Friday, April 08, 2011

Spendor Australis

Captains Macro Log, star date 08/8&^7/9&18

We have spent the last 3 days searching sector Alpha for the Ultimate Trade. Having taken damage from a surprise attack from the Aussieyen, USS-TMM has been repaired using its long Dilithium battery stocks and long equity core. We have now entered a spectacular binary star system in the Spendor Australis sector on a most critical mission of Australasian research. Our eminent professor, Dr Cpmppi, will attempt to study the decay of the consumer expelled at relativistic speeds from the massive stellar explosion in the commodities sector which will occur in a matter of weeks. Meanwhile our sensors are continuing to indicate a strong presence of the Borg who have locked on to the strong trend signals emanating from this system.

There are a few things about this system that have been causing USS-TMM's research crew to scratch their heads in recent months, the first of which is the slightly strange prudence of the Aussie consumer. The crew of the USS-TMM must admit that they have been surprised that despite a record surge in income growth on the back of the Klingon, sorry China driven Terms of Trade shock and very sharp rebound in the Aussie economy that Skippy and the rest of the Romulans haven't been loading up on plasmas and Priuses. Indeed, the savings ratio (see chart below), having spiked to levels not seen since the early-1980s has just gone sideways over the past couple of years.

Now, Starfleet Command reckon this is the result of the two speed economy of this Binary System, as the East deleverages from the housing boom, while the West increasingly falls under the gravitational influence of the Klingon Empire which has been scouring the galaxy for raw materials. And, as an explanation, that makes sense to some extent, but doesn't really stand up well to what the data is showing: State Unemployment rates (see chart below), while higher than the peak of 2007/8, are all still below what one might assume to be NAIRU.

So is it the debt load? The crew of the USS-TMM must admit they shake their heads in despair when the Bondvigilantians start jabbering on about debt-to-GDP ratios and the like, because that neglects to consider the other side of the balance sheet. And, as the below chart clearly demonstrates, while household debt stands at around 150% of household disposable income, household Net Worth sits at just below 600% of that number. It is therefore something of a stretch of the imagination to argue that the Romulans have over-leveraged themselves.

To dig a little deeper, TMM constructed a rudimentary model of Australian Retail Sales, which involved much tweaking to the warp drive engines given that the ABS appears stuck in the 20th Century in terms of both data frequency, quality and the existence of appropriate deflators, and make the ONS look positively competent. But anyway, TMM eventually managed to get the engines back online, inputting Consumer Confidence, Consumer Expectations, Wages, personal credit, terms of trade & house prices, with the system spitting out something vaguely resembling the actual data (see chart below). What is interesting to TMM is that post the 2001-3 slowdown, retail sales were also slow to move higher post the initial rebound, underperforming what one might imagine given what TMM reckon affects consumption. After a year or so, sales began to rise quite strongly to more in line with the model. So, under that prism, perhaps we should not be surprised at how tepid consumption has been so far? And although TMM's model has retreated from its highs, it is still pointing to ~2.5% real growth in retail sales in the coming months. Given that the official measure appears to have bottomed out, TMM are optimistic that the Romulans will return to their old habits in the coming months.

So what does that mean for the RBA? Well, in recent months, headline CPI has been falling, helped by the seemingly bulletproof Aussie Dollar, but in the coming months, favourable base effects drop out and the TD Inflation Gauge (see chart below, white line; headline CPI - orange line, RBA Trimmed Mean -yellow line) is pointing to inflation moving higher. TMM reckon the RBA is too optimistic in its inflation forecasts given both this and their expectation that the consumer is about to reawaken...

...so while on TMM's adjusted Taylor rule, the RBA are marginally ahead of the curve after November's hike, in TMM's view, in the coming months Fleet Admiral Stevens is likely to get itchy trigger fingers.

And given this, the curve does not appear to be pricing in enough tightening (see chart below, courtesy of TMM's allies on Planet Nomura).

Captains log Star date 08/8&^7/9&19

Target has been acquired and firing solution calculated. Photon Torpedoes armed and locked. USS-TMM is engaging Aussie Bills.

20 comments:

Robert in Chicago said...

One question screams out to me after reading this:

How much of that household net worth (600% of disposable income)is equity in a bubble-priced home?

cp said...
This comment has been removed by the author.
cpmppi said...

Hi Robert,

The answer to that is in the chart, and is around 430%. Now, whether or not that is bubble-priced or not is a far more complex question.

But I would note that there is little leverage there... and as one wise old trader once told me "if you're not leveraged, they can't hurt you"

cheers,
cpmppi

Anonymous said...

Obviously the wealth is not evenly distributed - so this chart tells you close to nothing in terms of who is leveraged and who is not. America also has vast household net worth but 1% of households controls more than a third and 25% more than 90%. I am not sure how vast overall wealth prevents a housing bubble from popping and forcing the most negatively geared participants (hint: first-time buyers with help of first home credit from the Aussie government) to default en-masse when the rates rise.

Bob_in_MA said...

That point about household assets being so much greater than debt is one of the ways the space mongrel Greenspan dismissed concerns of debt levels here, he's now serving time at a mining colony.

Using averages is pretty meaningless. If 50% of the assets are owned by top 5% of households, they generally aren't willing to share them when things get tough.

All the arguments against housing being a bubble in Australia were used here in 2005-2007: default rates were at all-time lows, there was a shortage of houses to meet all the demand, etc.

I wouldn't want to own a condo in Perth when China finally rebalances...

cpmppi said...

Hi Anon,

Yes, that is the one thing that is something of a worry, but here again, I'm not sure the numbers stack up. Unless I'm misunderstanding the data (which is also very possible!) there were only about 220k new first time buyer mortgages during that period. And while the leverage here is with those that are not necessarily able to cope with it if rates jump significantly higher, it doesn't seem to me that the amounts are big enough to affect nationwide consumption (220k*AUD300k ~AUD66bn mortgage value)... That said, it is definitely something to keep an eye on.

Of course, the existence of a housing bubble in Australia is also the subject of some contention, and one upon which I am undecided.

cheers,
cpmppi

LB said...

If you take a housing market that is already very expensive in terms of home price / income ratio (of which Australia has one of the highest) and an economy that is incredibly narrow (Wayne digging up rocks and selling them to Voldemort + Sheila selling Sydney condos to Shane Coppertrader and Mandy Banker) you still have the makings of a significant problem for the economy and a larger one for the banking sector.

The Aussie cricket team was arguably one of the finest the world has ever seen for more than a decade, but when you removed the two star bowlers (Warne and McGrath) and the hammers in the lineup (Gilchrist and Haydon) all of a sudden you could see the chinks in the armour.

nick said...

My humble view is that the trend in the savings rate has obviously changed and this was a pretty longterm trend wasn't it? I try to look at it from a behavioural point of view.If most of the households' wealth is in the form of housing assets or equities, then the 2008 crash isn't far off and the australian consumers still carry some scars from then, since they realized that their perceived wealth could vaporize in a very short time.Am I way off the mark in actually believing this?

Anonymous said...

lb,
One of the ways I always know when someone doesn't hactually have an argumnt is I wait for them to trot out the completely irrelevant analogy !
By the way I generally like your posts and some I think are exceptional. This wasn't one of them ;)

Let me out it this way. I'd rather have the problem OZ may have of an economy that is 2 speed because of it's core relationship with Asia and resource growth story. At least when ,or if they hit a rock they don't have a huge fiscal deficit to worry about when they decide to move rates to accomodate any weakness they don't think is healthy.
Should we all be that lucky !

Anonymous said...

My excuse for the spelling is it is Friday and a bottles already gone in !

nick said...

Besides, since when did acting rationally start making us look in astonishment...??I think that the same is going on in the US anyway, just the overall data is skewed by some incredibly high outliers or/and by the fact that working people have to support the newly-unemployed members of their family...Saving is impossible in such a situation...I don't think that consumer sentiment today has got in better shape since then...

Leftback said...

Anon @ 7:50

You're right, I didn't have an argument and my analogy was largely irrelevant.

Not one of my more exceptional days... a victim of some tool-like trading this week and clearly in need of a bottle myself. Cheers...

I do see housing bubble signs in both Australia and Canada - for the same reasons, hot money chasing assets into a commodity-based economy, but nobody can ever predict when a bubble will pop, even when clearly identifiable.

Anonymous said...

Me personally think that the housing bubble did pop after the GFC, you just have to look at the outlying suburbs, long commutes necessary through to the CBD. These areas are a wreck, but not reported.

Resistance in housing prices was felt in all the 'hot spots' due to increased foreign capital and the first home buyers grants, but this funding has worn off and with the increase in AUD and other problems for the foreign investors at home, they are now seeking to repatriate monies.

The trend therefore in the capital cities now will be down. Unless GilLARD needs to throw more money away.

In the main people are deleveraging. The baby boomers did learn from history. Other Gens are just watching with Higher Ed / Uni loans increasing, as the safe harbor is in the education and the Uni precinct.

The aussie Banks have had their peak run and the result will be a decline in assets from hereon in. Hence thy seek to expand offshore. They know that the assets and profits are now declining.

Watch the change of directional movement and stupid recycled asian and US investments to follow (like hello NAB etal involvement in Countrywide during the GFC .. like that was a WTF moment!!) All of this to support overpaid CEO's knee jerk reactions to their admin role and bowing to the RBA.

Problem is population and water. Always a problem and desalination plants are a joke, due to the high carbon cost to operate, impact on the salinity etal. A dry country with mother nature having no remorse for idiots that think green.

Maybe need support for water bonds (ASX traded) to fund Kimberley canal through to the Bight and then cede WA from Oz.

Voldamort then can join cowboys in Kal, TMM can operate through Broome and I can enjoy grape juice in Margaret River...

Nemo Incognito said...

Alright folks expect something from us soon on housing bubbles.... Anon @ 12:38 I'd agree on the bubble pop post GFC - check out Mobius' RMBS deals which are a disaster zone due to outer suburb exposures. Nonetheless, child's play when compared to anything in the US Sun Belt.

And with regards to water, its a serious issue.... we should probably do something on the inevitable rise in power prices in Australia, carbon tax or not. One of the biggest trends globally is everyone realizing that unless you are in Iceland the retail cost of power isn't going to be much less than 15 cents anywhere.

Anonymous said...

"Iceland". What a coincidence. I was just thinking the other day how Iceland having come through it's recent mess might now be worthy of a closer look given it's cast iron protection from global inflation driven by energy etc.

Nemo Incognito said...

Anon @ 10:31 some of us bought CENX back in 09...

Anonymous said...

House prices in Sydney have gone nowhere in seven years - in nominal terms! Saving rate has been trending up since 2005. RBA did some work for a box in their recent FSR - showed that most of the increase in mortgage debt (owner-occupied at least) between 2008 and 2009 was by older households with small mortgages, not young first-home buyers. Contrast this with their response and rhetoric in 2002-03 when they clearly were worried that a bubble might be forming.

Bob is right that using averages is meaningless (not that that stops some of the housing bears), but in this case, it emphasises how different Australia is from the US, which is frankly different from everywhere else.

Anonymous said...

Anon 4.44 am

Sydney prices impacted by the stupid local government. Look beyond Sydney at Central Coast, Wollongong Penrith all the high commute areas. Same applies all capital cities. Bigger impact to come due to the new lending legislation. Brisvegas and sunshine strip feeling it and it will spread.

New Perth beachfront (high end area) starting to really feel it now.

Those increase or second mtges by baby boomers are for the kids. Comes a time when the umbilical chord must be cut. At all costs including maintaining ones own sanity!

Rossco said...

A couple of anecdotes observations from sunny Aus....

Financial asset reporting heavily skewed by the compulsory superannuation system, people cannot spend it.

Bruce average is convinced that mortgage rates are heading higher and in some urban areas he is looking at 9.5 - 10x income : housing stock

Health care, utilities, stealth taxes, materials, unskilled labour, foodstuffs and fuel are all increasing.

A large amount of the wealth effect from mining related equities goes offshore.

The federal government has been on a hiring binge masking the unemployment / underemployment in productive industries. (kind of like the UK did)

Home equity withdrawal has slowed mark, rents are increasingedly

The average punter down here is NOT in good shape. Personally, I reckon the savings rate goes a lot higher.

Anonymous said...

China is the only relevant variable here.