News That's Fit To Punt - 01/Apr/2015

If A Fool In April, Perhaps A Fool All Year Around

This isn't a prank. Our treasurer really is the Worst Treasurer Ever. He's only waking up to it in his second year at the helm.

With the budget reeling from that external shock, the latest NAB quarterly consumer anxiety index has, for the first time, put consumers' concerns over government policy higher than the usual pre-occupations with the cost of living and worries over job security.

"Government policy is now the single biggest cause of anxiety for consumers, just ahead of cost of living, while job security continues to cause the least stress," said NAB's group chief economist Alan Oster.
"What it basically says is that the consumer is still scared, that's basically the bottom line."

The bank has warned that the sense of anxiousness is prompting consumers to eschew "non-essential" spending in favour of either saving or paying off non-discretionary commitments such as utilities and medical bills. 

Asked what concerns consumers identified and what they intended to spend on, Mr Oster said: "It's very much a picture of consumer who is doing what they have to do and who is not feeling happy."

How dumb is that? They ran an election campaign on scares, and now that they're in power they've sunk the economy with the very same scares. People believed them. Then they cut the budget hard, and so the people believed them more. If you lie to the people enough, they believe your lies and do the things that come back to bite you.

The Customer Is Always The Patsy

During the GFC, all the banks were found out; by found out, I mean, the world found out that the banks didn't carry enough liquidity to cover all the extreme positions. In Australia, the government guaranteed the deposits and basically backed the 4 major banks and Macquarie Bank, declaring them "too big to fail" (Also known as TBTF). Since then there's been BASEL, I, II and III agreements demanding that banks carry more capital.

Here's the response to the rise in demand to raise and preserve capital:

Two of Australia's largest banks are warning that interest rates on loans could rise if they are made to carry more capital, suggesting they will favour shareholders over customers as global regulators consider creating larger equity buffers in banks to protect the financial system from future crises.

In a dialling-up of resistance to being forced to increase capital carried against mortgages, as recommended by David Murray's financial system inquiry, the Commonwealth Bank of Australia said higher mortgage risk weights, which determine the riskiness of a loan and how much capital must be set aside, would "restrict the cost-efficient provision of credit to consumers". A consequence would be "that costs for home loans increase on average across the economy", the bank said.

You gotta laugh. Of course they would argue that  - but they're taking the piss.
That's exactly how we got into trouble in the first place when big banks in America started handing out cheap loans to inappropriate people, and then divvied up the debt positions and turned them into mortgage bonds. When the inappropriate loans customers defaulted, the whole edifice came to a stop and the whole financial sector gagged on the shit sandwich that we have lovingly come to remember as the subprime loans crisis.

Yes, all those stupid 'subprime' loans all blowing up at once! The banks are misremembering the sequence of events that nearly destroyed them. If banks need to store more capital to be safe, then they should. If that means a couple of points higher on the interest rates, so be it. If this scares off some of the customers, well heck, you probably don't want those subprime-y customers. This is not a bad thing.

Iron Ore Hits Rock Bottom, Could Even Go Much Lower 

Yeah, let's see now. In the 6years we've been able to see the spot precision iron, it's never been so bad for iron ore prices.

Iron ore started the year at $US68 after losing half its value in 2014, but the fallout has accelerated with a fresh record low of almost $US51 a tonne hit on Wednesday.

The question has changed quickly from whether the price would have a five in front of it in 2015 to whether the price start would start with a four. 

A flood of new supply from the majors - BHP, Rio, Brazil's Vale and Fortescue Metals Group - and stalling Chinese steel demand growth have together crushed the price.
Despite the cries of protest from Fortescue, which is the highest cost producer of the majors, as well as smaller industry players, and the state and federal governments whose budgets have been smashed by the price collapse, Rio and BHP are sticking firmly to their expansion targets.

UBS mining analyst Glyn Lawcock said the iron ore price could soon fall into the $US40s but that would not push Rio and BHP to review their strategies.

"Having a four in front of the price is not far away and is entirely possible given what we've seen in the past few days," Mr Lawcock told Fairfax Media.

And yes, it could very well get there soon.
Here's a quick question. How is it possible for China to be growing its GDP at 8.7% in 2009, 10.1% in 2010  and 7.5% this year, while iron ore fluctuates this much in-between? If anything makes you suspicious of Chinese GDP numbers, it's the relative stability of the GDP figure sin thecae of such fluctuating costs of raw materials. It's basically more evidence that the GDP figures from China are made up 'aspirational targets' and not actually measured values.

The current drop in spot prices has been credited to the explosion in the supply side for iron ore, but it seems more pertinent to ask why the demand side for why iron ore is dropping so much.