Themes of 2013

A couple of stories setting the tone into 2014.  First to the layoffs at tinned fruit company SPC, killed by the high Aussie dollar and competition from China - much like the rest of Australia's non-resources economy, but also involving inefficient workplaces, stifling regulation and political interference:

FEDERAL cabinet has demanded new assurances from Coca-Cola Amatil to justify taxpayer aid for its fruit processing division in another sign of Tony Abbott's hard line on industry assistance.... 

....Cabinet remains broadly reluctant to give the company the cash it seeks and there is "no sense of urgency" to completing the deal, The Australian was told after yesterday revealing the deep concerns about the company's request for public funds (here)

....

...Over the next three years, Simplot will revamp Devonport and upgrade Echuca so that both plants are also efficient. Simplot managers and workers must also adopt the most flexible practices to make this work....So why wouldn't Coles and Woolworths do this for SPC? The simple problem is that the management and workers at SPC are not up to it, and their management and work practices belong to a totally different era. Worse still, SPC makes canned fruit, which consumers no longer want.

A substantial investment is therefore required in a new plant to package fruit in the way supermarket customers want to buy it....The government has appointed some excellent people to look at the SPC problem, but the panel includes Greg Combet. While the deep-seated problems at SPC are not Combet's fault, he played a role in the ALP industrial relations legislation that compounded SPC's problems. (here)

The other news item for which there may be more happening is the overvalued Aussie banks and the question of how much they will need in reserves going forward.  This week, suggesting likely future difficulties, the regulator APRA required the banks to increase their capital reserves.  This was mostly to do with implementation of Basel Committee on Banking Supervision requirements and may not be enough in the event of a sharp downturn:

"It'll be a relief," said Ric Spooner, a Sydney-based trader at broker CMC Markets. "And the actual buffer increase was probably at the lower end of expectations."(here)

A collateralised economy?

The FT Alphaville has a fascinating blog examining the trend for distortions in long term pricing trends of commodities due to monetary easing and negative inflationary expectations.  The journalists have noticed that monetary easing by the Federal Reserve has adjusted the yield curve for commodities and for the last few years encouraged holding of commodities as collateral (rather than to be used for  industrial and traditional purposes).  All well and good but the amount of money tied up has led to an overhang which stands to be wiped out when rates rise - which they are doing now and money moves from commodities into finanical instruments again.

Link here:  http://ftalphaville.ft.com/2013/06/05/1525542/the-rise-of-the-real-collateral-mining-business/

The article explains a lot of the distortions in commodity markets and consequentially the financial markets.  But it seems to raise a question - while all of the above is bad for individual entities or whole industries which suffer from commodity stockpiles, could a whole economy with a sufficient commodity weighting be at risk?

Meanwhile Aussie banks are suffering from the outflow of liquidity in the primary instance anyway - so  Australia learns it is now an unpredictable emerging (resources) nmarket as far as international financiers are concerned?!

Given that the near costless credit and liquidity the Fed, the European Central Bank and the Bank of Japan have been pumping into the global financial system has spawned a multitude of carry trades and a global search for yield, even the slightest prospect that the US might begin scaling back its quantitative easing program was likely to spark a rush for the exits from those trades. (here)

Oz Banks face headwinds

...Fitch Ratings says a likely modest weakening in Australian banks' operating environment during 2013 is unlikely by itself to result in negative rating action. A more severe downturn could drive negative action although this is not the agency's base case. In a report published today, Fitch says it expects Australian banks' profit growth to come under pressure in 2013, due to likely subdued credit growth and a potential rise in impairment charges. However, loan losses should easily be absorbed by pre-impairment operating profits, as Australian banks are, and should remain, among the most profitable in the world... (here)

...S&P said that the outlook for the AA- rating held by the big four banks is “stable”, but warned there was a greater chance of a downgrade in 2013 than an upgrade....

“While our most likely scenario for the Australian banking sector in 2013 is continued ratings stability, we note that there remains downside risk, and we cannot discount the possibility of negative rating momentum,” the S&P report said, according to the AFR....(here)