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  • Article – Today’s Keynesians have learnt nothing : third wave group
    sell off And it is not just inflation that bond investors fear Foreign holders of US debt and they account for 47 per cent of the federal debt in public hands worry about some kind of future default The Keynesians say the bond vigilantes are mythical creatures The anti Keynesians notably Harvard economics professor Robert Barro say the real myth is the Keynesian multiplier which is supposed to convert a fiscal stimulus into a significantly larger boost to aggregate demand On the contrary supersized deficits are denting business confidence not least by implying higher future taxes And so the argument goes round and around to the great delight of the financial media as the dog days of summer set in In some ways of course this is not an argument about economics at all It is an argument about history When Franklin Roosevelt became president in 1933 the deficit was already running at 4 7 per cent of GDP It rose to a peak of 5 6 per cent in 1934 The federal debt burden rose only slightly from 40 to 45 per cent of GDP prior to the outbreak of the second world war It was the war that saw the US and all the other combatants embark on fiscal expansions of the sort we have seen since 2007 So what we are witnessing today has less to do with the 1930s than with the 1940s it is world war finance without the war But the differences are immense First the US financed its huge wartime deficits from domestic savings via the sale of war bonds Second wartime economies were essentially closed so there was no leakage of fiscal stimulus Third war economies worked at maximum capacity all kinds of controls had to be imposed on the private sector to prevent inflation Today s war like deficits are being run at a time when the US is heavily reliant on foreign lenders not least its rising strategic rival China which holds 11 per cent of US Treasuries in public hands at a time when economies are open so American stimulus can end up benefiting Chinese exporters and at a time when there is much under utilised capacity so that deflation is a bigger threat than inflation Are there precedents for such a combination Certainly Long before Keynes was even born weak governments in countries from Argentina to Venezuela used to experiment with large peace time deficits to see if there were ways of avoiding hard choices The experiments invariably ended in one of two ways Either the foreign lenders got fleeced through default or the domestic lenders got fleeced through inflation When economies were growing sluggishly that could be slow in coming But there invariably came a point when money creation by the central bank triggered an upsurge in inflationary expectations In 1981 the US economist Thomas Sargent wrote a seminal paper on The Ends of Four Big Inflations It was in many ways the epitaph for the Keynesian

    Original URL path: http://www.thirdwavegroup.com.au/general/article-today%e2%80%99s-keynesians-have-learnt-nothing/ (2013-02-03)
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  • Tidal Report – 18 Jul 2010 – Strong jobs market a mirage : third wave group
    OECD countries What is revealing though is that Australia s employment rate ranks only twentieth of the twenty seven countries as far as prime age workers are concerned Australia it says has a large pool of under employed workers with 25 per cent of those with jobs working part time and 21 per cent of people of prime working age 25 54 having no job at all The OECD report also shows that more than 90 per cent of the reduction in total hours worked in Australia in the two years to the end of 2009 was due to declining working hours rather than a reduction in employment This compares with just 50 per cent on average in previous downturns Any continuation of this trend will have severe consequences on the ability of the average Australian to service the country s record levels of debt These concerns are being revealed in other surveys In more than 630 interviews conducted in marginal electorates across Australia the majority of voters said they felt the economy was volatile and families are now hurting more than at the height of the GFC More than half of those surveyed said they were saving no money each week Meanwhile the retail sector is feeling the brunt Australian Retailers Association director Russell Zimmerman said that although retail stores were holding mid year sales they were not selling the stock It s tough out there and retailers are finding it harder to move product at the moment than they have in the past They are offering 50 60 and 70 per cent off sales which is unheard of We are seeing that 20 per cent off isn t enough to entice customers these days he said Of course to add to all of this will be the inevitable increase in interest rates outside the scope of any RBA moves as the international price of money increases In late June Westpac had to pay 35 basis points more than seven months previously when it raised 800 million Elsewhere a report by Macquarie Equities Research shows that the banks could justify increasing their standard variable interest rates but were unlikely to so do before the election Macquarie analyst Michael Wiblin said the Australian banks had not been able to follow the global trend of retail banks especially in Britain increasing standard variable rates to absorb higher funding costs British banks have increased their rates by up to five times more than Australian institutions Bank of Queensland chief operating officer Ram Kangatharan has confirmed that tougher funding conditions are putting pressure on banks margins On the wholesale side things are getting tougher Competition for retail deposits remains fierce with the only growth in this sector solely driven by hot money chasing special offers Sustainable retail deposit growth is pretty tough in this environment All of the banks are starting to feel the pinch in terms of deposit margins As the pressure continues on the majors they would want to move outside

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-18-jul-2010-strong-jobs-market-a-mirage/ (2013-02-03)
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  • Tidal Report – 11 Jun 2010 – The Great Fiddle : third wave group
    it however briefly into actual policy As Henry had explained the 40c rate could have been 99c and it wouldn t have altered a single resources investment decision Again as they say quite That s an explanation best delivered to the most sympathetic of listeners those men in the white coats It was left to Goldman Sachs JBWere to try to fill in the gaps It came up with an estimate that the changes to the tax would cost 3bn in revenue in the first two years and a total of 39bn out to 2020 Henry was reported as also being equally dismissive of doing such projections out to 2020 despite having presided over Treasury doing exactly that in the 2009 budget to chart a course back to budget surplus On one level all of this is an argument over how many angels will fit on the pinhead We will find out what the tax raises in its first year 2012 13 assuming it survives either Tony Abbott or the Senate in 2012 13 That will be dependent on commodity prices in that year not what they are forecast now to be in that year But also what corporate profits are in that year not quite the same thing This points to the more basic assumption underlying both versions of the tax which amounts to Gillard s and Kevin Rudd s even bigger hypocrisy For rather than struggling with the two clunky variations of the tax s name there is a much simpler much more accurate name It should be called the China Prosperity Tax Or perhaps with all due deference to the events of the 1930s the China Co Prosperity Tax In concept it is based entirely on the belief hope that China will keep on booming That it will consume and this is crucial ever more and more of our coal and iron ore No China boom no high commodity prices as estimated by Treasury no super profits no resource tax revenues And it s worth adding no budget surplus It is not sufficient for China to maintain some growth in its economy far less just sustain the level of its current activity It has to keep growing at around 10 per cent a year give or take a percentage point or two either way every year Even one year of time out would be devastating for commodity prices and our tax revenues Why Well deputy Reserve Bank governor Ric Battelino captured the answer in a graph in a speech earlier this year Over the last 150 or so years every time we had experienced a commodity boom it instantly busted Commodity prices hit a peak and then immediately plunged They never plateaued at a high level The explanation is in the nature of the commodity cycle High prices drag in new and accelerating production Both BHP Billiton and Rio Tinto are expanding their Pilbara mines to each produce 200 million tonnes a year every year on the

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-11-jun-2010-the-great-fiddle/ (2013-02-03)
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  • Tidal Report – 3 Jul 2010 – Austerity, the new black : third wave group
    the depth and duration of the decline is without precedent in the post Great Depression era Alan Kohler in his Saturday morning note to Eureka Report subscribers expresses his dismay as well But I reckon it s much worse than disappointing it s REALLY bad The Fed has kept rates near enough to zero for 18 months it started cutting three years ago has now printed US2 trillion in new money and there has been enough borrowed fiscal stimulus to sink a fleet of battleships and keep the US bankrupt for generations yet unemployment is still 9 5 per cent And it would be 10 per cent except hundreds of thousands of people are just giving up Also the housing market has not recovered at all This disappointment has started to be reflected in stockmarkets around the world In Australia the S P ASX 200 closed on Friday at 4 222 7 representing a 16 per cent fall from its recent April high More dramatically however this market has fallen from 4 622 to 4 222 a 9 per cent fall in just 9 days The heady days of reaching the psychologically significant 5 000 mark seem a distant memory This places the Australian market back to levels last seen in July 2009 but more significantly back to levels first seen in March 2005 In effect the market is back where it was five years ago What has happened Quite simply the optimism that developed after the GFC low in March 2009 and which propelled markets almost continually for over a year has started to evaporate The fuel of markets investor sentiment has now turned from optimism to pessimism brought about it seems by a slow dawning of the very real problems still facing the world economy World economic thought basically falls into two camps Those that take account of the levels of debt in an economy and those that do not The latter group the Keynesians are still advocating further economic stimulus and more debt The former group predicted the GFC and are firmly of the view that we have only just begun a long period of deleveraging and that social sentiment has turned from borrow and spend to pay off debt and save The new world view is starting to hit mainstream thinking if recent ads for Ubank are anything to go by Austerity is becoming the new buzz word for governments and is the new black The result World growth will contract credit will contract and a consequence of this will be a return to normality where debt no longer fuels consumer led economic activity What does this mean for stockmarkets Following such sharp recent falls people can of course be forgiven for thinking this is a great time to buy shares As regular readers will know we have been advocating restraint for some time and in fact said in December 2009 There has been a topping process occurring over the last month with choppy sideways moves

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-3-jul-2010-austerity-the-new-black/ (2013-02-03)
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  • Tidal Report – 26 Jun 2010 – Stim-u-less : third wave group
    For many southern European countries fiscal stimulus is no longer an option anyway due to the prohibitive interest rates required to finance the ever increasing budget deficits Jean Claude Trichet European Central Bank president and architect of the 1 trillion rescue fund has been arguing in recent weeks that fiscal prudence is the best medicine for the European economy Unless Europeans believe that governments can get control of their budgets then households are going to be frightened they will not spend he said Companies will not prepare for the future Meanwhile in China there is concern that continued stimulus is creating unsustainable asset bubbles in that country Besides burdening governments with unnecessary debt fiscal stimulus in the form of extra government spending has used up funds at the expense of the private sector It is the availability of funds that is central to sustaining economic activity Effectively excessive fiscal stimulus is preventing a healthy recovery Tony Makin is astonished at how little attention this unwelcome effect receives It is remarkable how its importance has been neglected in interpretations of the worldwide response that followed the GFC Given the unprecedented global fiscal stimulus of recent years it is therefore no surprise that funds for business ventures are in shorter supply than previously globally and domestically Ironically according to studies by Harvard University professor Alberto Alesina and Goldman Sachs Group Inc economists Kevin Daly and Ben Broadbent governments can actually stimulate economic expansion by spending cuts a concept that completely contradicts the stimulus approach Alesina said in a recent interview There have been mountains of evidence in which cutting government spending has been associated with increases in growth but people still don t quite get it Broadbent and Daly said that the key is an emphasis on cutting spending rather than raising taxes Lower spending means consumers and companies don t fear higher taxes so demand accelerates and a smaller public sector also helps reduce borrowing costs and makes economies more competitive as fewer government workers lighten labor expenses Karl Denninger author of the well regarded MarketTicker has been arguing for years that increased government spending only delays the inevitable particularly when the problem to begin with is debt The problem with papering over recessions is that you don t really avoid them you just compound and defer their effects When the economy starts to run into credit capacity problems you re then driven to embed structural deficits into government spending to keep the Ponzi Scheme going And when that fails you become Iceland or Greece Just in time for the G20 summit in Toronto this week Australia received a blistering criticism of its stimulus spending from a rather unexpected quarter distinguished economist and RBA governor Warwick McKibbin I disagreed with the scale of the stimulus package and I would say I was right It wasn t evidence based policy they panicked The government put the money into school buildings they put it in insulation they put it in stuff they could

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-26-jun-2010-stim-u-less/ (2013-02-03)
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  • Tidal Report – 19 Jun 2010 – Cracks appearing in housing’s foundations : third wave group
    prices The boost last year was of course the most recent of many and it is clear from the data that on each occasion house prices were artificially inflated This is of course unsustainable and the end result of all this leverage is that mortgage debt now comprises a staggering 90 per cent of GDP compared with just 20 per cent in 1990 Housing credit has taken over the whole credit market in recent years At the beginning of the 1990s business lending accounted for 60 per cent of the credit market it is now only 40 per cent At the same time household credit has doubled from 25 per cent to 50 per cent The problem with this trend is that the Australian economy now uses most of its credit to buy and sell houses instead of attempting to create manufacture or provide services to it The end result of this enormous growth in housing credit is that in real terms house prices have effectively doubled since 1990 but at a cost of a four and a half fold increase in mortgage debt This places the housing market in a highly vulnerable situation When people become less willing to take on more debt or begin to pay off debt the inevitable consequence is that prices suffer and investor emotions turn from greed to fear A once positive feedback loop of rising credit and rising prices becomes a negative feedback loop of less debt and falling prices Simple maths shows that this explosion of debt cannot go on indefinitely with debt to disposable income ratios now reaching 160 per cent So are things changing Certainly business lending is contracting due to a combination of banks being less willing to lend and businesses less eager to borrow Business credit is down 10 per cent from its peak in November 2008 In 2009 commercial property sales decreased by an alarming 30 per cent and the average capital value of industrial properties has fallen 25 per cent from its peak 2 years ago Will this extend to housing As we noted last week there has recently been an extraordinary collapse in home loans It is lending data however that is genuinely alarming Australian Bureau of Statistics data shows that in April demand for new home loans fell to a nine year low and finance commitments for owner occupied housing fell 1 8 per cent This is the lowest number of new loans for owner occupiers since March 2001 and the seventh straight monthly fall in housing finance commitments There were just 46 000 new home loans in April a 25 per cent fall from the same month in 2009 when the boost was in full swing Anecdotally conveyancers in Brisbane are reporting a complete collapse in business As the number of properties on the market rises and auction clearance rates fall expect to see more concern expressed in the general media There are expected to be 1 000 houses for auction in Melbourne

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-19-jun-2010-cracks-appearing-in-housings-foundations/ (2013-02-03)
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  • Article – The RSPT house-price risk : third wave group
    budget estimates a tax that makes uneconomic most of those new mining projects and will therefore stop bank funding Then realising its mistake the government is now scrambling around looking to negotiate its way out Yet the only real way out is to dramatically change its proposed resource super profits tax including the retrospective nature of it and as a result slash future revenue from the government s coffers The fear is now spreading The big lenders to Australia China Japan and the Middle East and European institutions are now worried there has been a fundamental change in the sovereign risk of Australia because we have started to do silly things This is critical because our four major banks borrow overseas to fund about 40 per cent of every housing loan If share and commodity markets keep rising and there are no major problems in China then we will ride on the back of global enthusiasm mining tax or no mining tax In other words those fears by the lenders to Australia will be covered by good times But if something goes wrong in the world particularly if banks become nervous about lending to each other then we will no longer have the economic standing to rise above the problems as we did in the global financial crisis In simple terms if there are serious global problems during the next three or four years our banks will not be able to roll over the enormous amounts they have borrowed in the past unless they pay a substantial risk premium Raising more money could be out of the question Banks will attempt to cover any overseas shortfall by attracting local term deposits via higher interest rates The combination of less money and higher interest rates will bring down the value of houses because it s the availability of bank finance and its cost as much as dwelling demand and supply that sets the level of house prices And so a family wanting to borrow 500 000 might find they can only obtain 400 000 and so they will pay 100 000 less for the dwelling they want Treasury is forecasting that the world will trade well in the next few years and in particular China will continue to boom and there will be uninterrupted growth If they are right then home owners will continue to sleep well and house prices will be maintained or will rise But if treasury is wrong about global events then those visiting Spain should have a peep at the Spanish housing market which is down sharply because banks can t fund the old levels That s where we are headed without our security blanket for tough times When Kevin Rudd and Wayne Swan apparently acting alone decided to go for a mining tax I am sure they had no idea that there were increasing the risk for every Australian with a major investment in a dwelling particularly if they have borrowed large sums Category general posts

    Original URL path: http://www.thirdwavegroup.com.au/general/article-the-rspt-house-price-risk/ (2013-02-03)
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  • Tidal Report – 12 Jun 2010 – Consumers go frugal! : third wave group
    vulnerability to shocks such as a fall in income to a greater extent than would be prudent And in recent days the warnings appear to be coming from all quarters Last week saw credit rating agency Standard Poor s warn that Australia s record debt levels could expose borrowers to greater financial shock should interest rates or unemployment rise as was seen in the US during the financial crisis Several weeks ago International Monetary Fund economist Prakash Loungani presented an analysis of house price busts in the OECD since the 1970s concluding that house prices would fall much farther and for much longer He paid particular attention to Australia saying that it was one of the countries suffering the largest distortion between house price values and average incomes as well as the most significant gap between price to rent values Finally a slightly left field warning came from a survey by the Finance Sector Union which showed that 29 per cent of its members felt uncomfortable about their customers ability to meet their financial obligations with new debt products and about 43 per cent said they are under pressure to sell debt products even if customers don t ask for them and may not be able to afford them And it appears households have been paying attention and getting a little freaked out The Westpac Melbourne Institute consumer sentiment index fell by 5 7 per cent this month following a 7 per cent fall in May making it the largest two month fall since March 2008 The score for international conditions was the highest since the Asian financial crisis in 1997 98 even higher than scores registered during the recent global financial crisis This fall in sentiment is being reflected in the willingness of consumers to shop Recent retail trade figures show sales were up a rather disappointing 0 6 per cent in April compared to March and largely the result of aggressive discounting Australian Retailers Association s Russell Zimmerman says things have worsened since Some shopping centres in Sydney are seeing a 10 per cent decline in customer numbers people don t want to go to a shopping centre because they are worried they ll be tempted to spend money It is lending data however that is genuinely alarming Australian Bureau of Statistics data shows that in April demand for new home loans fell to a nine year low and finance commitments for owner occupied housing fell 1 8 per cent This is the lowest number of new loans for owner occupiers since March 2001 and the seventh straight monthly fall in housing finance commitments Investors however continue to increase their borrowing which is hiding the unprecedented departure of owner occupiers in the aggregate figures but investors do not have the firepower to pick up the slack as Professor Steve Keen explains So the Great White Hope for the housing market is the White Shoe Brigade of housing investors But here yet another reality check is required even with

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-12-jun-2010-consumers-go-frugal/ (2013-02-03)
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