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).

Step back from CMBS support

...Australia will stop buying mortgage bonds as a revival in the market means the government’s support is no longer needed, according to Treasurer Wayne Swan.

The cost of issuing residential mortgage-backed securities has recovered since the credit freeze in 2008 that prompted the creation of the government’s RMBS program, Swan said in the text of a speech to be delivered today at the Bloomberg Australia Economic Summit in Sydney. Although it doesn’t plan new purchases, the government won’t sell the securities it owns in the near future, he said....

...The Australian Office of Financial Management, which administers the RMBS program, has spent A$15.5 billion of its A$20 billion budget, according to information on its website. The program aimed to spur competition in the nation’s home loan market by helping smaller lenders fund themselves.... (here)

Will Australia rebalance? Has any economy rebalanced?

No and no.  Not in the short term anyway.  Whenever you read about politicians and/or bureaucrats having to engineer a rebalancing or engineer a soft landing, you know they will not succeed.  An excellent FT article paints the picture: 


...many forecasters are still worried. They do not believe business investment will be a major driver of growth and argue the Australian economy will have to rely even more heavily on housing construction to meet the RBA’s 2013 GDP growth forecast of 2.5 per cent....As such, they reckon the central bank, which has lowered its benchmark cash rate by 175 basis points since November 2011, will be forced to cut again to stimulate demand....

....“I think we are more of a quarry than what we were 50 years ago and that worries me. The strong mining cycle can’t last forever, that’s inevitable,” Bob Every, the chairman of retail and resources conglomerate Wesfarmers, told a gathering of business leaders in Sydney earlier this month. (here)

A petition to Glenn Stevens

Rumoured at one point to be the highest paid central banker in the world, Glenn Stevens, has been reappointed as governor of the RBA.  As his second three year term commences, we would like to petition Governor Stevens in respect of the following items which we believe must be addressed urgently:

1. The mining boom is over.  Stop twisting monetary policy to suit this bloated sector and start to focus on the ailing real economy.

2.  Admit the obvious and stop ignoring the currency war.  It is foolish to maintain one's head above the parapet.  All central banks are engaged in debasing their currencies.  The textbook has been ripped up and it is now beggar-thy-neighbour policies.  Ignore this at your peril - the high AUD is hollowing out the economy.

3. Accept that Australia is flooded in hot money which will withdraw in a hurry when yields return to normal.  Reread point 2 in respect of the high AUD.

4. Prepare for vaporisation of the banking system.  The safety in conservatism of the banking system is a myth (and that means the liquidity facility will be used for solvency).

5. Taking account of conditions in Australia and observing overseas, true inflation is much higher than official figures and should be dealt with accordingly.  Australian's purchasing power is soon to erode and quickly.

That's five big points to tackle Glenn.  If you have others, please comment or send an email to feedbackformhere@googlemail.com

Home sales slide...

While the mining boom flickers out, Australia's other, real economy has tanked and no the Ozzie dream of the quarter acre block will not save all...

MacroBusiness economist Leith van Onselen said that sales in the detached new homes market were now tracking at their lowest annual level in the 16-year history of the series...."It's the worst February on record," he said....

...Victoria posted the weakest performance by far, with detached home sales dropping 13.7 per cent...."Victoria's detached new homes market is extremely sick," Mr van Onselen said, noting that the problem has been exasperated by the cancellation of the $13,000 first home bonus in July last year....

...The slide has come despite many developers offering steep incentives – including cars, cash rebates and home decorating packages – in bid to entice buyers back into the market.... (here)

An alternative to big banks?

In addition to tracking any bank crisis which occurs in Australia, this blog will also try to look at any alternatives to the big banks, where savers can move their money.

So a good place to start is a post on the topic by savingsguide.com.au.  A fair point that it makes in favour of building societies and credit unions is their narrower focus and conservative practices - in short they are not tainted by vast portfolios of toxic loans and vaults of alphabet soup securities:

 ...Though many credit unions and building societies have been around for many years, earning the reputation as sound platforms for financial management. Even St.George bank started out in the early days as a building society. So the answer is they are safe. They are highly regulated just like the banks, just without the numerous layers of fluff....(here)

Liquidity v Solvency again

One man's assistance is another man's bailout...

In the world of bank recapitalisations little is clear and labels are important as substance.  Of the many banks which imploded or suffered from the ongoing implosion in Europe, a vast number had been given a clean bill of health by the European Banking Agency during post-2007 stress tests.  In fairness the tests were focussed on liquidity management (liquidity strain being identified as the immediate cause of failures of banks like Bear Stearns and Lehman which kicked off the crisis), while as many now know (except it seems the heads of the EU and the ECB, the crisis has morphed into one of solvency - banks just don't have enough capital in general (as opposed to immediate funds to hand and agreed credit lines to see off a sharp rise in demand for return of funds).

And so it is that the same debate is playing out in Australia in respect of its new bank liquidity facility.  As noted several times in this blog, this has been characterised as a backstop, a safety measure which should not have to be used, or if used, only to cover temporary liquidity demands.  Taking this at face value there are fair questions to answer, but interestingly Michael West had an article out where he disputes the purpose - that the facility is in fact, simply a bailout fund from the RBA - with the suggestion being that Australia's banks are much weaker than they represent.

Over to Michael:

...Glenn Stevens doesn't think it's a bailout fund. It's a Committed Liquidity Facility - the $380 billion in Reserve Bank rescue money, sorry ''liquidity'' that is, which the banks can access should they find themselves in strife....Under this thingamajig, one must select one's words with care, if you are a bank and you are about to bite the dust then you can forget about a bailout. If you are even tempted to whisper the word bailout, snap out of it!...

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...If, however, you encounter ''an acute stress scenario'', why not shimmy on down to Martin Place - but only if you need a little something to facilitate your liquidity in a committed kind of way - flop out the old paw for a spot of lazy taxpayer liquidity, say $20 billion, and Bob's your uncle. Or rather Glenn's your lender. This is no freebie. You will pay dearly - a heinous 40 basis points over the official cash rate....

...Yes, you can only access this exciting opportunity if you are a bank and you are ''illiquid'', but not ''insolvent''. It is beyond this mere chronicler to explore the fathomless schism between a bank that finds itself illiquid and one that finds itself insolvent....(here)

This is not too different from some schemes tried elsewhere and the main message from the crisis in other jurisdictions is that early recognition and writedown of bad banks is necessary (this is the difference between the US and EU response).  Given that thanks to the EU, we are now in a world of depositor bail-ins (with New Zealand and Canada indicating they are considering such contributions so that bondholders, depositors and all sorts of creditors likely to be hit if a bank fails), the strong suspicion is that, notwithstanding the arrangements discussed beforehand, any stress at a major Australian bank will be messy.