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  • Descending the Slope of Hope : third wave group
    In the end the denial confirmed the bail out Sir Humphrey usually knows how such things actually work So of course Merkel s denial struck me as especially interesting I don t want to sound too glib or too jokey but I wonder if there has ever been a forced devaluation that wasn t preceded by ringing assertions from presidents and central bank governors that under no circumstance would the currency ever devalue What is all the more interesting is that I recently discovered that the quote never believe anything until it is officially denied doesn t originate with the writers of the British TV comedy Apparently it can be traced to at least as far back as Otto von Bismarck who was born not too far from where Angela Merkel grew up Never believe anything until it is officially denied the Iron Chancellor warned us For those interested in understanding the only real options avavilable to Europe the entire Michael Pettis article is essential reading So if Germany s Iron Lady is now denying that the euro will fail can its failure be far off It depends I guess on what we mean by failure If any important reversal in the structure and membership of the euro is a failure then it will almost certainly fail but I suppose there are many ways the euro project can be transformed without quite calling it a failure At the end of last month Hans Olaf Henkel for example the former head of the Federation of German Industries had an interesting OpEd in the Financial Times In his piece he says Having been an early supporter of the euro I now consider my engagement to be the biggest professional mistake I ever made But I do have a solution to the escalating crisis Instead of addressing the true causes politicians prescribe painkillers The euro patient suffers from three discrete diseases as a result of the financial crisis many banks are still unstable the negative effects an overvalued euro has on the competitiveness of the south including Belgium and France the huge level of debt of some eurozone countries It would be misleading to proclaim there is an easy way out But it is irresponsible to maintain there is no alternative There is The end result of plan A defend the euro at all cost will be detrimental to all Rescue deals have led the eurozone on the slippery path to the irresponsibility of a transfer union If everybody is responsible for everybody s debts no one is Competition between politicians in the eurozone will focus on who gets most at the expense of the others The result is clear more debts higher inflation and a lower standard of living The eurozone s competitiveness is bound to fall behind other regions of the world As a plan B George Soros suggests that a Greek default need not be disorderly or result in its departure from the eurozone But a Greek default or departure

    Original URL path: http://www.thirdwavegroup.com.au/general/descending-the-slope-of-hope/ (2013-02-03)
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  • Australia’s sugar daddy stalling : third wave group
    progress said Diana Choyleva from Lombard Street Research Beijing has actively sought to cool overheating alarmed by inflation above 6pc and price to income ratios for property in the rich coastal cities nearing wild extremes of 20 But it does not want the economy to jerk violently from boom to bust The historic pattern of global crises is that the region emerging strongest is often prey to its own crisis three years later or so usually because it was able to respond with a blast of credit that stored up problems for the future Japan brushed off the 1987 crash only to succumb in 1990 the US dodged the Asian crisis in 1998 only to face the dotcom collapse in 2001 Fitch Ratings said it may downgrade China if the banks get into trouble requiring another bail out from Beijing The agency said in July that credit growth was still running at a 38pc increase this year if you include off books financing such as letters of credit trust loans and loans from Hong Kong banks Leverage is higher than meets the eye China s banking system is the largest fastest growing but most thinly capitalised among emerging markets said the report s author Charlene Chu Some 55pc of all new lending now comes from outside the banking system three times the level in 2006 That China s economy is slowing while financing is still so abundant illustrates how dependent growth remains on loose funding she said The economic return on each extra yuan of credit collapsed from 0 75pc to 0 18pc during the credit spree after Lehman It has yet to recover fully Mrs Chu said China s credit boom does not match Iceland which saw credit to GDP rise from 130pc to 440pc over five years but is significantly worse than the jump in the US before the sub prime crisis or even in Japan before the Nikkei bubble burst Such a rapid run up in leverage is a sign that the incremental return on credit has declined meaning that borrowers ability to repay is not keeping pace said Fitch The agency fears that non performing loans could rise from 2pc of GDP last year to up to 30pc China s central bank has belatedly begun to tackle off books lending on top of interest rate rises and a relentless increase in the reserve ratio to 21 5pc It now targeting the methods used to circumvent monetary controls according to the authoritative Caixin Magazine The regulators aim to choke off 150bn in credit over the next six months Yet as the government tightens the screw it risks knocking away the rickety props beneath China s local governments which have built up 1 7 trillion of liabilities in a patronage spree The localities depend on land sales for 40pc of their income If we have a hard landing the government is not going to be able to pay salaries said Wang Jianlin Dalian s biggest property developer What

    Original URL path: http://www.thirdwavegroup.com.au/general/australias-sugar-daddy-stalling/ (2013-02-03)
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  • What housing undersupply? : third wave group
    rate over the last twelve months As a result the underlying demand for new housing has dropped from 180 000 starts per annum to around 125 000 While dwelling starts are declining we are now building too much stock Unless new housing starts decline in earnest or population growth accelerates Victoria South Australia Tasmania and the Northern Territory face an oversupply Perth and Canberra are better positioned with Queensland currently at equilibrium and New South Wales undersupplied Much of Victoria s potential pain lies in Melbourne s recent inner city apartment boom during which an unprecedented proportion of the state s new dwelling starts are apartments This mostly speculator fuelled surge has provided some very misleading media headlines of late about the rise of apartment living and how it is becoming the new Australian dream Yet two thirds of Australians continue to buy a detached dwelling What This cannot be right The housing industry and banking economists keep reminding us how undersupplied the Australian housing market is Don t we have a shortfall of something like 300 000 new homes across the country And isn t this shortfall going to double in size within the next decade But I ask you with an average of 2 6 people per dwelling as per the 2006 census where are these 800 000 odd displaced people living Yes too many are living it rough but 800 000 people equate to two cities the size of Canberra or one and a half of the Gold Coast Where are all these people living I don t see thousands sleeping in cardboard boxes in Queen Street for example With this thought in mind a few years back I started questioning the undersupply myth I too was guilty of its circulation and maybe more so than others But once you look into the facts and ignore the spin you find that Australia s new housing market isn t that undersupplied at all Yes we don t have enough affordable new homes under 400 000 for two and three bedroom stock but we have an ample supply of new dwellings pitched at speculators Also as I have outlined numerous times before the housing industry is being forced to deliver the wrong stock and that which is supplied costs way too much Ask yourself why new housing sales only a decade or so ago accounted for 30 per cent of the total residential transactions in this country but today account for just 10 per cent Hmmmm And if we are so undersupplied why do developers need to sell their new dwellings overseas and increasingly via aggressive investment selling campaigns and expos So why is underlying demand much less than the urban boosters want us to believe Spare capacity The 2006 census showed that there were 830 000 unoccupied dwellings across Australia They aren t all apartments on the coast They are second hand homes used only occasionally Estimates suggest that about 40 per cent of them are detached homes

    Original URL path: http://www.thirdwavegroup.com.au/general/what-housing-undersupply/ (2013-02-03)
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  • Australian banks vulnerable . . . still : third wave group
    will be far far wider as the idiotic market finally grasps what we have been saying for two years that you can t have your cake and eat it or said otherwise that when you onboard corporate risk to the sovereign someone has to pay the piper Yet there is one place where that has not happened so far there is one place that has been very much insulated from the whipping of the market and one place where banks are potentially in just as bad a shape as anywhere else in Europe That place is Canada As the chart below shows which is a ranking of global banks by tangible common equity lowest first of the banks with a TCE ratio of under 4 a whopping 30 are those situated in Canada the same place where nobody thinks anything can go wrong and which has been completely spared from the retribution of the bond vigilantes Something tells us Canadian sovereign CDS not to mention Canadian bank CDS are both about to go quite a bit wider How do Australia s banks rate on the Tangible Common Equity TCE scale Better But not that much better Take note dear reader Here we are about to see a classic example of how our Treasurer wilfully cherry picks from International Monetary Fund reports Here s what The Goose recently had to say about the IMF s latest report The IMF has just completed a regular review of Australia s finances The Treasurer Wayne Swan reported the results He said the IMF had noted our resilient financial system Australia s banks are well capitalised prudently managed and among the highest rated in the world Mr Swan said The IMF notes that banks have improved their capital positions and reduced their reliance on short term foreign funding and that they are well placed to ride out any future financial turbulence in offshore markets he added Wayne has as usual gilded the lily and put words in the mouth of the authorities he quotes And he just happened to conveniently forget what else the IMF wrote emphasis added 17 Bank profits have recovered and the return on equity for the major banks is now around pre crisis levels Capital adequacy has improved driven both by increases in capital and declines in risk weighted assets Common equity as a share of tangible assets has also risen to nearly 5 percent for the four large banks Oops A TCE of nearly 5 is not exactly streets ahead of the Canadian banks Moreover nearly 5 is actually worse than the 5 42 TCE of Italian bank Intesa Sanpaolo see ZH chart above whose shares have been under attack and subject to multiple trading halts in the last fortnight to save it from collapse 18 Challenges remain however Banks may be tempted to take on riskier strategies in an environment of structurally lower credit growth Household debt remains high 150 percent of disposable income and a rise in mortgage

    Original URL path: http://www.thirdwavegroup.com.au/general/australian-banks-vulnerable-still/ (2013-02-03)
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  • Chicken or egg – the unemployment effect : third wave group
    all that makes sense the charts Leith shows to demonstrate this cascade are profound First there s this spectacular chart from the ANZ Bank s New Zealand economics team confirming the housing wealth effect in a very explicit way for New Zealand And this chart from Deloitte shows a similar relationship between house prices and consumption in the UK Finally there s my attempt at recreating the above charts for Australia Given the correlation this chart does not bode well for retailers in the short term that blue line looks like it wants to follow that red line down In what could be an ominous sign for Australian retailers the decline in real home prices over the past year has yet to be reflected in the household consumption figures which have yet to turn down from their post GFC bounce If the recent correlation between home values and household consumption holds then Australian retailers could face several quarters of declining sales growth ahead To give this concept some perspective Gavin Putland from the Land Values Research Group shows that historically housing leads the economy into recession The recession of late 1975 occurred while home prices were still falling from the 1974 peak The double dip recession of 1981 3 followed the home price peak of early 1981 The recession we had to have followed the home price peak of 1989 The dip in economic growth in 2004 and the subsequent period of ordinary growth in spite of the historic improvement in the terms of trade followed the home price peak of late 2003 The near recession of late 2008 which was a recession by almost any measure except the official one followed the home price peak of late 2007 Gavin has a remarkable piece of research that analyses the relationship between innumerable recessions and property prices worldwide It is reasonably dense work but well worth a read For the time poor here are his conclusions A downturn in the property market especially in turnover sales of properties is a leading indicator of recession with a lead time of up to 9 quarters for turnover or up to 8 quarters for values Of all the countries in which a conspicuous fall in turnover was documented there was no case in which the onset of recession preceded the fall in turnover and only one case Taiwan in which the onset of recession seems to have been in the same quarter as the fall in turnover and in the one case Italy in which recession preceded the downturn in property values it did not precede the downturn in turnover In the property market a fall in turnover is a leading indicator of a fall in prices and the lead time is usually one to two quarters In no case is there persuasive evidence of the fall in prices coming first although there are three cases Taiwan Russia South Korea in which the two falls may have been almost simultaneous and one case Norway

    Original URL path: http://www.thirdwavegroup.com.au/general/chicken-or-egg-the-unemployment-effect/ (2013-02-03)
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  • The recovery that isn’t : third wave group
    to say that the chart showing the pace of this jobs recovery vs all other jobs recoveries was the scariest jobs chart ever see here for example But we ve since changed our mind It s the average duration of unemployment which surges without any sign of slowing down that s really scary right now Not only is this number taking off like a rocket but it potentially represents people permanently and structurally kept out of the jobs market Be afraid What Joe said Category general posts Tags employment united states Leave A Comment Click here to cancel reply Name required Mail will not be published required Website subscribe Have our blog posts delivered straight to your inbox categories general posts tidal reports latest posts The story silver tells Is the end game in sight for Greece Descending the Slope of Hope Australia s sugar daddy stalling What housing undersupply Australian banks vulnerable still Chicken or egg the unemployment effect The recovery that isn t McKibbin you ve done it again What does this chart tell you tag cloud alan kohler australia banks ben bernanke britain china commodities currency debt deflation deleveraging demographia report economy employment europe first home owners

    Original URL path: http://www.thirdwavegroup.com.au/general/the-recovery-that-isnt/ (2013-02-03)
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  • McKibbin, you’ve done it again! : third wave group
    gap of least 30 per cent Given existing economic conditions these countries desperately need a debt rescheduling or default plus a real exchange rate depreciation to restore competitiveness and growth Yet due to being within the eurozone the depreciation cannot come through the nominal exchange rate while Germany remains strong The only option is a price deflation of 30 per cent Surprisingly some countries have started the process of trying to achieve this by imposing tough austerity measures Undertaking a fiscal contraction in a fixed exchange rate system seems impossible economically or socially The politics cannot sustain this within these economies Another question is whether German taxpayers are willing to bail out the governments of southern Europe When the problem was just Greece and Ireland this was conceivable indeed it should have been done initially Now that the fiscal unsustainability club has some new applicants including Italy and Spain the problem has morphed into a dual problem of too big to fail and too big to bail Even with a huge fiscal bailout the impediment to a recovery in Europe is the euro Either there will be a disorderly exit by countries from the eurozone or policy makers in Europe could contemplate a sensible response The euro could be divided into a two tier system A premier league with Germany France and other northern European countries and a first division with the crisis economies trading a different euro a PIGLET at a 35 per cent discount would be a good start In the US the problems are different The US economy has massively misallocated capital for more than a decade due to a variety of regulatory financial and political distortions Dealing with this requires substantial balance sheet adjustments including significant deleveraging in parts of the economy Wealth had been destroyed and a long period of adjustment was inevitable Instead the government treated this as a cyclical downturn that could be fixed with a hefty fiscal stimulus and zero interest rates This response failed to do much except transfer the need to deleverage from the household and banking system into the federal government and the Federal Reserve The S P downgrade is not the problem Excessive government debt and a lack of understanding of the issues and the solutions by policy makers and politicians are the problem The US should follow International Monetary Fund advice and announce a credible future fiscal consolidation of up to 10 per cent of GDP by 2020 Cuts beginning next year would start the growth recovery this year but during 2012 to 2014 our modelling suggests growth will be weak before a substantial recovery after that The announcement of an inflation target of 5 per cent by the Fed would help as well Australia is now likely to be hit with a second global shock This is different from the GFC in a critical respect It is a concern over excessive government debt so the response in Australia should not entail a new fiscal package Indeed

    Original URL path: http://www.thirdwavegroup.com.au/general/mckibbin-youve-done-it-again/ (2013-02-03)
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  • What does this chart tell you? : third wave group
    the USA The goverment stimulus has provided a table top to the classic bubble graph I firmly believe that Australia is similar all every aspect of the econamy as that of other countries that have already had a housing crash ongoing We will suffer the same fate 60 falls over the next five years The housing crash will be the cause of job losses and a stock market crash not the other way around Reply peter forrest says August 12 2011 at 8 22 pm Australia here we come 30 drop in the next 12 18 months Reply Leave A Comment Click here to cancel reply Name required Mail will not be published required Website subscribe Have our blog posts delivered straight to your inbox categories general posts tidal reports latest posts The story silver tells Is the end game in sight for Greece Descending the Slope of Hope Australia s sugar daddy stalling What housing undersupply Australian banks vulnerable still Chicken or egg the unemployment effect The recovery that isn t McKibbin you ve done it again What does this chart tell you tag cloud alan kohler australia banks ben bernanke britain china commodities currency debt deflation deleveraging demographia

    Original URL path: http://www.thirdwavegroup.com.au/general/what-does-this-chart-tell-you/ (2013-02-03)
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