Holy Smokes It's A Brexit

More Surprising Than The GFC Itself

What do you make of this result? If a month ago the notion of the United Kingdom leaving the European Union seemed like a non-issue, it all of a sudden heated up today as the polls closed an lo and behold the UK had voted to exit the EU. It's a staggering result that flies in the face oft only the rhetoric or accepted wisdom or common sense. Nigel Farage went from being a joke and a potential footnote in history to being the face of the man who rallied petty nationalism and jingoism to reverse the historic decision for the UK to join the EC in the first place.

Pollsters are looking really bad out of all this. Not only did they screw up the last election, they totally misread the public mood for this referendum. Also looking bad is David Cameron who called on the referendum and pitched for the 'remain' camp. In fact the majority of the British Parliament would support remaining in the EU so it will be curious to see how that respond to the outcome.

The vote result has caused chaos across global markets including the ASX where $50billion was wiped off the bourse today. That's like a regular day during the GFC for losses but still, you get the feeling that people are taking money out of markets just to feel like they're doing something. Also in the news today was the collapse of the Pound Sterling which has sunk to levels not seen since 1985.

All that being said, I did get a more nuanced whiff of just what was ailing the common voter in England, who were keen to tell me on Facebook just how much the rule of Brussels rankled with them, as well as just how much of a strain Europeans were putting on the NHS. If the British were going to protect the NHS, they had to - they argued - quit on the EU. There were other issues as well, such as just who these people in Brussels were to be making such sweeping laws ("un-eleced filth!") that supersede national sovereign laws of a land, and how such laws were handing over fishing right in waters around the UK to landlocked countries like Hungary.

Really, it wasn't really to do with the xenophobic impulses as claimed by the campaigners to remain. It had a lot more to do with the fact that Westminster had been relegated to rubber-stamping laws created in Brussels, and that those laws were not working at all in the British context. Europe will rightly be smarting from this result. The ramifications are multiple and here are a few that I can think of just off the top of my head:

• Scotland will want to have a do-over of their secession referendum. Scotland wants to remain in the EU. 
• Presumably Norther Ireland wants to stay in the EU. Otherwise it has to organise borders with Ireland. If Scotland and Northern Ireland split, the Brexit would have brought about the end of the Unite Kingdom. Not sure how the Queen deals with this as she's still Queen unto the Scots but it brings those old hoary questions back into the limelight. 
• Can the City of London stay the financial hub of Europe when it no longer is in Europe and will presumably have trade barriers with Europe? Will the British economy recede from its current model of being built around finance, insurance and real estate banking? 
• Grexit is firmly back on the agenda. If the UK can exit the EU, then Greece will see that they can force the issue to get out. This would be sensible except... here come another round of Grexit-Fear market gyrations
• What trade deals now and how? When the UK is out, what kind of barriers to trade will there be with Europe? One imagines these will be high, just to punish the UK for leaving. In fact Brexit means the UK has opted to go with less leverage when it needs to negotiate more.
• David Cameron must be done as Prime Minister. I can't imagine he survives the week now that he's spent his political capital and it all went up in flames. Could the next PM be *gasp* Boris Johnson? What kind of world are we living in when ugly populists like the Johnsons and Farages of the world win and ... heck why not mention it, Donald Trump is a nominee to be a presidential candidate for the Republicans?

Apart from the bit where David Cameron loses his job, a lot of that is actually quite difficult to digest. In any case, it's an historic day indeed.

It's kind of funny to reflect back on the moment the UK joined the EEC way back in 1972. France made it conditional that the UK ditch its favourable trade arrangements with her former colonies, and so Australia and New Zealand were - for a better word - 'dumped' by the Mother Country. Australia's modern identity really emerges from that historic moment when the Mother Country jumped into a bed with the French and the Germans and abandoned her children to make their own way in the world. The massive shift towards Australia's engagement with Asia which started in the mid-70s directly follows on from that rather uneasy historic moment. For the most part Australia has done okay out of that change. It forced the country to grow up quite a bit, become more cosmopolitan and less parochial, and maybe even a little more sophisticated in its dealings with the old dart.

That being said, should the UK start renegotiating all its trade deals and come knocking in Australia, and should there be an ALP government around, the UK would best be reminded of this history, and perhaps even be asked whether they would like to revisit 'Terra Nullius' in their Parliament - perhaps even offer an apology to the indigenous peoples of Australia and New Zealand. There's a lot of unfinished business to be discussed.

UPDATE: "And he's gone! David Cameron, gone for a duck...as he trudges away from the crease. Took a big swiping shot and skied the ball. Not a very good captain's knock..."

Quick Shots - 09/Feb/2016

Hard Landing In China - "We Crash, You Die!"

Pleiades sent me an article in the AFR today outlining the retreat of bank shares this year. it's not exactly joyous reading. Pleiades thinks this is the shit hitting the fan. He is probably right.

So far this year, European bank stocks have dropped more than 20 per cent, and this pattern continued overnight, with both Deutsche Bank and Commerzbank shedding more than 7.4 per cent. The shares in three big Greek banks all slumped more than 27 per cent on Monday night. 

At the same time, worries about tighter financial conditions weighed on US bank stocks, with Morgan Stanley dropping 6.4 per cent, while Goldman Sachs falling 4.8 per cent.
At the weekend, China said its foreign exchange reserves dropped nearly $US$100 billion ($141 billion) last month to the lowest level in more than three years as Beijing further sells dollars to prop up the yuan. 

China's foreign exchange reserves now stand at $US3.23 trillion, about 20 per cent below the peak of nearly $US4 trillion reached in mid-2014.

Capital flight out of China is accelerating not slowing down.  There's really no sugarcoating the fact that China is slowing down towards a hard landing. Nobody really manages 'soft landings' but on the scale of measuring just how hard a landing this is going to be, it looks like it's gong to be solidly hard.

Abenomics Is Reaching The End in Japan

The latest news out of Japan with its NIRP (yes, negative interest rates policy) is that Abenomimcs has failed. Stocks, USD/JPY trade and Bond yields have collapsed. Naturally, banks are taking a hammering over in Japan as well. The markets are indicating Abenomics simply is not working.

The market's reaction is getting duller day by day. The negative interest rates boosted the market only for two days," said Norihiro Fujito, senior investment analyst at Mitsubishi UFJ Morgan Stanley Securities, and trading data shows even that was down to short-term "gamblers", he added. 

A week later, even those gains are gone, as foreign investors withdrew a net 207 billion yen from the market, taking their total for 2016 to more than 1 trillion yen. U.S.-based Japanese stock funds also saw an outflow in the week ended Feb 3.

Curiously, the Yen rose against the US dollar, even as foreign investors pulled out of Japanese markets.

So, even if the US is doing much better now, with interest rates going up, two out of three of Australia's trading partners are going through what can only really be described as bad times.

Deutsche Bank is now issuing statements defending its liquidity, which is like a throwback right to the GFC. At this point the scuttlebutt is that DB might be the new Lehmann. This is not surprising because Deutsche Bank is neck deep in derivatives that have gone sour, and for a long time it was speculated that any movement of US interest rates would blow up positions taken by those derivatives and adversely affect Deutsche Bank.

Judging from the headlines, it's clear we've entered a new phase in the repercussions from the GFC. It may just be the point at which all the Quantitative Easing and money printing is now coming back with consequences to roost. The Central Banks can't very well spend even more in an attempt to spend their way out of the woods.

View From the Couch - 17/Jul/2015

Greek Drama Day 2,190

I've been on holidays for a couple of days so I didn't catch much news. That was sort of the point of the holidays: to get away from it all, and that sort of included this business of blogging stuff.

Anyway... Greece seems to have gone into a political meltdown. First, the Syriza PM Tsipras negotiated for Greece a worse settlement that was on offer for Greece before the 'Greferendum'. somewhere around 30-40 MPs of his side refused to back the deal, but with cross-bench support, Tsipras shepherd the changes Greece had to make, through its Parliament. The only way to understand this turn of events is that Grexit - to the consternation of many - was simply too hard to do and Greece would have plunged into being like an African nation where nobody lends them money and nobody goes there because everything has been looted.

And believe me, everybody will be looting everything the moment Grexit happens and there's not enough of food or medical supplies or oil or cash. There won't be a police force because they won't be able to pay them; and schools will shutdown, infrastructure will shut down. How is the complete and utter capitulation better than that? At least the banks will open again.

You have to understand that the oligarchical rich Greeks who brought about the conditions of Greece to be in the Euro and so much in debt still have lots of money in those banks. All the MPs on the conservative side of politics have that problem - they need the banks to reopen even if only briefly so they can take whatever cash they can and get it out. I know it's a terrible thing to ascribe such a terrible motive to these lawmakers but these are extraordinary times. And let's not forget, conservative lawmakers in any land are the rich, if not the proxies for the rich. They will take any amount of financial pain to their fellow citizen as long as they can keep their rents going; something that's true even in Australia, but that's another story.

All this hollows out the 'Greferndum' as well as underscores why Yanis Varoufakis might have resigned at the point he did. It simply didn't matter what the Greek people - the demos! - wanted. There was no real negotiation, it was simply terms being dictated to Greece by the ECB, EU and to a lesser extent, the IMF. Leading the assault (so to speak) was Angela Merkel who on behalf of Germany essentially gave nothing and got everything. Unfortunately Tsipras now looks like an asshat clown instead of the modern day Themistocles; but all of this might be part of a greater strategy to better engineer a good Grexit rather than a bad one.

Angela Merkel and the northern alliance of countries, banksters and technocrats - the modern day barbaroi - have essentially cited the rule of law as the cornerstone from which they are making their demands and refusing to give any debt relief. Hidden in there somewhere is still the trillions of dollars worth of Greek Bond derivatives that would blow up on a Grexit, so getting this deal done without the haircuts is a great boon for them. It means Germany won't be plunged into the kind of chaos seen on the streets of Athens, and by extension it means the world markets won't be roiled in another GFC so soon after the last one.

Old World Problems

The European Union isn't looking too flash hot these days. Given the choice of kicking out Greece or keeping it and helping it as one of their own, they opted to keep Greece so they can keep kicking it which combines the worst aspect of both options. This does not look good to anybody. Since its inception in the early 90s, the European Union had argue its wide, pan-nationalistic cause against nationalist right wing nutjobs in each and every country. By approaching Greece the way it has for the last 5 years, they've opened up a front to the left as well as to the right, whereby Syriza and Podemos in Spain have now split off to the left of the EU andean demonstrate that the loss sovereignty in the EU project is a major problem for countries with great debt and great unemployment.

Inadvertently, the winningness of Germany on its own has redistributed its low-industrial high-unemployment problem to the PIIGS nations, where they don'thave the control to ameliorate the unemployment being exported out of Germany. All these countries in the advanced, old-world share the problem of not knowing where future growth is going to come from, and so interest rates have fallen to zero, just to keep the economy going and from asset prices from collapsing. In this light, it makes sense that banks become gamblers locked in a zero-sum game (low to no growth) and making money/saving money involves taking it from somebody else (hello Liberal Party of Australia).

The world is running out of growth because there are so few spaces in which to grow. We can chop down all the forests in Amazon and clear out the last remaining wildlife sanctuaries in Africa, but there is not enough space into which the globalised economy can grow. The emerging markets are a higher grower right now, only because they're starting from a lower base. Even their growth will run down, just as it has in China. It's what it means to have a developed economy.

In the absence of a physical frontier, there is only the cyber frontier until space opens up. This explains Google, Amazon, Apple, Microsoft and Facebook, and how Elon Musk is busily building up SpaceX. It should tell you something about where the smart money thinks things are at.

As for Europe, this dynamic is playing out in a new way. Europe will now cannibalise Greece to keep the rest afloat. But it also means the PIIGS are next in line to be cannibalised once Greece descends into the pit of depression. And if the same treatment descends upon the PIIGS, how soon will it become like 1930s Germany where Leftists and Fascists fight in the streets? Or there is a new civil war in Spain? Many of these conflicts now echo older ones, precisely because they're being fought over old settlements that are now being undone in the light of zero growth, ZIRP, and high unemployment. Economic settlements are only as good as the money spent to maintain them. When it becomes cheaper and expedient to let the people starve and fight it in the streets, we'll see some realpolitik and class warfare as a certainty.

Varoufakis Resigns

Notes From The Eye Of The Storm

A bit of a curious gesture from the Greek government upon finding validation at the ballot box, is that Finance Minister Yanis Varoufakis has resigned. Heck, I may as well quote most of it here:

The referendum of 5th July will stay in history as a unique moment when a small European nation rose up against debt-bondage. 

Like all struggles for democratic rights, so too this historic rejection of the Eurogroup’s 25th June ultimatum comes with a large price tag attached. It is, therefore, essential that the great capital bestowed upon our government by the splendid NO vote be invested immediately into a YES to a proper resolution – to an agreement that involves debt restructuring, less austerity, redistribution in favour of the needy, and real reforms. 

Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today. 

I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum. 

And I shall wear the creditors’ loathing with pride.

It's pretty self-explanatory. In exchange for making some kind of deal to stick, he took himself out of the picture. It's an extraordinary turn of events, but then again, so is the whole situation where by a European nation has defaulted and its citizens have voted 'no' to more austerity.

I would hazard a guess and say that Mr. Varoufakis saw things through to their logical conclusion. It's now up to the European Central Bank to come to the table, and recognise that debt reduction is going to be there as a legitimate bargaining point. Watching things from the great distance here in Australia, it strikes one as being an important moment in the aftermath of the GFC where perhaps bankers in Europe have to face the music for their failures instead of being bailed out and collecting their bonuses while enforcing austerity on a whole nation. 

There was this interesting little panel doing the rounds today on Facebook:

Oddly enough, Deutsche Bank has already been bailed out for about the same amount of money it would take to bail out Greece. I know they're sitting on trillions of derivatives that could blow up as a result of a Grexit, but surely they don't want to blow themselves up that badly. 

Conversations Around The Traps

Who Suffers From Zero Interest Rate Policy?

Zero interest Rate Policy or ZIRP as it is known in some circles has been going on for two decades in Japan. It has also been going on for 7 years in the USA and Europe. The reasons have ostensibly been from keeping asset prices to stopping banks from toppling over due to lack of liquidity, through to keeping people employed. The extremely accommodating policy has been running parallel with the Quantitative Easing program in the US and Europe which have somehow helped to prop up asset prices in bubble condition around the globe, but also not spurred growth as promised.

The way the traditional/classical economy was supposed to work was that lower interests would fund capital investment for the next phase of economic growth. Instead the low interest rates have allowed speculators to place bets at lower cost, while the piled up debt has eaten into future growth in a big way. The point of all this is to say, the things the easy money has gone towards have not been exactly productive or helpful, while there are people who are genuinely suffering because interest rates have been kept so low for so long.

For instance retirees in America and Europe with some amount of money saved up during their working lives would be finding that they won't be living off the interest of the money they saved, but be forced to eat into their savings just to survive. This sort of thing can be seen as a breaking of the social contract. There would be a whole generation of kids growing up without learning about the virtues of saving because  they've never seen interest payments on their bank accounts. I don't think this is a good thing because we're raising people who haven't seen the benefits of saving and compound interest.

Worse still, with something like QE going on at the same time, Zero Interest rate translates into a situation where you cannot sit on cash because inflation is eating away at that value; and you can't stay in bonds because whole countries have been threatening to default for the last 3 years. That leaves equities or foreign currency trades, and they're no guarantee of a return.

In fact, it's worth asking at this point in time why people who save should suffer at the hands of the Central Bank while it essentially rewards people who go into debt to buy into positions. Why is it that people should not sit on their earnings as savings? If deflation is such a threat, then why is it so bad if the man on the street is able to get more for less?

Frankly I think the world is getting ripped off.

Politicians Lie, But Must They Be Brazen About It?

I was in a conversation earlier tonight with walk-off HBP, and the issue came up about how the Murdoch press essentially insist on telling non-truths and heavily-spun tag lines, all of which amount to nothing but lies. It's like an Orwellian thing where untruths are shouted out loud until everybody accepts it as the dominant discourse and acquiesces.

But then Tony Abbott gets up and celebrates the repealing of the Carbon Price, characterising it s this bug bear in the economy that was raising people's costs of living while not doing anything at all for the environment, and that his government is a "conservationist" government. All of these things are wrong. The Carbon Price was hardly a blip in the rising retail power prices, it was contributing to the reduction of our emissions, and there is no way you can call a government that insists on dismantling the Carbon Price system a conservationist government in any dialect or accent of English.

It's an astounding thing that we have a Prime Minister that stands there and spouts untruths as if they were truth, pronouncing white is black and black is white. I can accept that politicians will work the facts of the matter in their favour through spin, and that they sometimes get it wrong, making them liars after the fact. I just can't recall a single Prime Minister of this land lying knowingly with a straight face and expecting the people to buy it. This isn't "no child will live in poverty" things where a politician simply gets the scope of the problem wrong. These things happen and I don't judge too harshly. Going right back to Malcolm Fraser and looking through all the NSW premiers, I don't think I've seen a single head of government lie with a straight face as Tony Abbott does.

This is a person who knows the science but chooses to ignore it; understands the facts and chooses to deny them; and then acts on the worst possible advice for ideological reasons and then says he is something that that he has never ever been; and that the ignoring and denying of science and facts and going against them for ideological reasons represents something that is positive for this country when it clearly is not. For Abbott to characterise his government as 'conservationist', he may as well as be saying his is a ballerina government, or an artistic government, or a caring compassionate government, or a forward-looking government. These things are equally Un-true of his government as the expedient, idle, lunatic, conceited claim that his is a conservationist government, especially having repealed the Carbon Price legislation, and telling us this at the press conference to announce the repeal.

I've just never seen anything like it. And my mind boggles, my brain explodes... It's like a never ending torture of our minds.

News That's Fit To Punt - 01/Feb/2012

Citizen Rinehart

The richest woman in Australia, Gina Rinehart has set her mind on buying into Fairfax, the company that owns the Sydney Morning Herald, and the Age, amongst other mastheads. The response coming out of the Fairfax stables has been interesting.

Here's Michael West:

The Murdoch press is already favourably disposed to the Minerals Council view of the world while Rinehart's politics are said to be strenuously ideological in the fashion of her late father Lang Hancock. Rinehart control of the Fairfax mastheads could have a dramatic influence on politics in this country.
Any tussle, then, for the venerable Fairfax mastheads would entail not just economic considerations, but community and political issues too. These issues would play into the hands of the institutional shareholders who would no doubt demand recompense for parting with the major mastheads and the effect this could have on the attendant Fairfax transactional businesses, which feed off the enormous online traffic.

Apart from matters of price, then, there would be much focus on the likely direction of Fairfax editorial. And some ideas from Lang Hancock in his book, Wake Up Australia, provide some hints, such as how "we can change the situation so as to limit the power of government".

"It could be broken by obtaining control of the media and then educating the public," he wrote.

There were several ideas on how to gain control of the press. One was for Australian retailers to refuse "to give advertisements to any paper which did not support a change in the constitution to reduce government to an absolute minimum".

"Control of the press could also be obtained by several of the big mining groups banding together with a view to taking over one or more of the present giant newspaper chains which control the TV and radio channels, and converting them to the path of 'free enterprise'," he said.

That's pretty sobering. the SMH might be transformed into a broadsheet with even sillier, shallower, more fascist tendencies than a Murdoch rag. I think it would be the end of public discourse in Sydney.

Here's a link to what politicians think:

Political reaction to the news of mining billionaire Gina Rinehart's increased stake in Fairfax Media has been mixed with Opposition treasury spokesman Joe Hockey saying he is "comfortable" with the move.

But the Australian Greens have described the trend towards a handful of individuals owning swathes of the media as "dangerous".

Communications spokesman Scott Ludlam says concentrated media ownership by individuals means Australia is unhealthy for democracy.

Senator Ludlam says the national laws against concentration of ownership in the media are now far too weak after being "gutted by the Howard government".

The Greens Senator claimed Ms Rinehart has "indicated a desire to have more influence over national affairs" and that she had "campaigned against Labor's mining tax to protect her own commercial interests."

Interesting how Joe Hockey is merely comfortable. You'd think he'd jump up and down with joy at the thought that a right wing nutjob is trying to seize editorial control of the SMH.

For the record, this is Gina Rinehart's view on several subjects:

Mining tax:
"[The Minerals Resource Rent tax] damages investor confidence and renders formally attractive and value-adding projects less viable".
"One of the issues that needs to be tackled is the cost, risk and time lost on approvals, permits and licences before revenue can be earned, [which] has very greatly increased in Australia, making it almost impossible for small companies to carry and comply with such burdens," Mrs Rinehart said.
Advertisement: Story continues below
"If our costs get out of kilter through excessive taxation or excessive regulation on top of our other high costs we already have, this is just making it more difficult."
Carbon tax:
"We must drop these taxes or we risk the bureaucracy becoming the only growth industry in Australia."
"After this unnecessary shock to investment and exploration the carbon tax (and MRRT) is causing, we should also demand from our politicians that they introduce legislation that requires a majority by referendum before they can introduce any new taxes or tax increases."

God help us all from this woman's political views.

Anyway, I note all this because it was interesting how the SMH kept spitting out bits and pieces about Rinehart today as the story unfolded. It ain't over 'til the fat lady sings and at the moment she's busy buying up shares.

Between An Angry Devil And A Poison Deep Blue Sea

It just gets worse and worse over in Greece and by extension, Europe.

All leaders of the euro zone are insisting that forcing private creditors to take a hit on Greek bonds constitutes a “unique” event, for fear of causing contagion. But spreads on Portuguese bonds are rising to alarming levels, and the outlook for Italy and Spain is still wobbly.

“An inability to tackle a problem the size of Greece inspires little confidence in the ability of the EU to tackle Italy and Spain,” says Sony Kapoor, head of Re-Define, a financial think-tank in Brussels.

Germany parried demands, from Mr Monti and others, to enlarge the firewall by merging the existing temporary European Financial Stability Facility (EFSF) and the permanent new European Stability Mechanism (ESM). This would enlarge the fund from €500 billion ($659 billion) to €750 billion. Mrs Merkel said the matter should be discussed in March, as decided in last December’s summit.

March, says Angela Merkel. The Economist suggests the investors should take more losses.

What is the best way out of this mess? Step one is to force private bondholders to take more losses. They have been treated with kid gloves so far because European governments insist the debt deal must be voluntary, thanks in part to a misplaced fear of triggering credit-default swaps. That must change. Discard the veneer of voluntarism and Greece can be tougher on its creditors. It should pass a law that retroactively introduces collective-action clauses into all domestic-debt contracts (making it easier to impose debt deals on recalcitrant bondholders). If it does this now there is still, just, enough time to organise a big, coercive, but orderly, restructuring of Greek bonds by March 20th.

So mark that date down as the date hell will break loose on the markets again. 20th March.

While I'm at it I think it's worth linking to this little thing from Boris Johnson.

Now in the old days, before the euro, there was a simple solution that allowed the Italians to keep producing cars of the same quality and to keep unit costs down. It was devaluation, and if you look at the postwar career of the lira (and just about every European currency) against the Deutschmark, you can see how it worked. As the mark appreciated, it was more expensive for Italians to buy a German car; and as the Italian currency fell, Italian cars remained a good buy in Germany. The tragedy now is that this option is closed off for the euro-zone members - and look at the Italian car industry.

Manufacturers can no longer use the lira to compete on price, and they are being utterly stuffed. Italian car sales fell 15.3 per cent in December, while sales of German cars grew 8.8 per cent. The Italians now produce fewer cars than the British do, and their markets are being relentlessly gobbled by Audis and Beemers and other beautifully engineered machines from Germany.

It is worth pointing out again that the Germans get a great deal out of the Euro for being the Euro in that it lowers the prices of their exports significantly; which is exactly why Angela Merkel is running around trying to save the Euro because the Germans stand to lose a lot if and when the Euro breaks up and they have to reissue the Deutsche Mark, and it appreciates like the Yen and suddenly nobody on the planet can afford German products except "the 1%". It might be cheaper to buy all of Greece than to keep haggling over its debt.

Property Bubble Babble

I know this blog has gone in weird directions at time in pursuit of interesting tidbits to do with the GFC, and I have to say one of the weirder aspects of the GFC has been the sustained property bubble in Australia. It's so weird, people are used to this bubble but as I pointed out yesterday, there's no real reason for Australia's real estate to be so much more pricier than other parts of the world. yes, it's really nice here in parts, but so are Greek Island Villas that come in cheaper than some flats in long-established suburbs in Sydney.

Anyway, I got this link from Skarp today which points out 4 reasons why there is a bubble going on, tangential to what the other fellow Professor Steve Keene says. Embedded in it is this link here, which is sort of prequel to the other link. The take away message is that it wasn't the non-recourse lending in America that led to the subprime problem, it was the extreme lending. Housing prices don't always go up, and in the long view of history, any tie that it does is an anomaly. There is no housing shortage as claimed by the peak bodies, and Australian banks have not lent conservatively as claimed, which feeds back into the recourse lending argument.

I do want  to point to this bit:

Rational discussion about the state of the property market is fraught. Many outspoken bubble deniers are conflicted by their interests in industry and government. Many – not all – are employed by, consult for, manage, and/or own organisations with a direct interest in maintaining the status quo of an overvalued property (land) market. These institutions are primarily commercial lenders, investment banks, real estate intelligence firms, insurance, real estate agents, Treasury, the RBA, vote-seeking politicians, and the mass media.

Skilled and intelligent specialists, trained in neoclassical economics in leading US institutions, did not see their enormous housing bubble until it burst in front of them with horrendous consequences. What makes Australia’s “experts” any more competent?

As investor Jeremy Grantham has noted: “Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different."

All this is to say it's worth looking at the Australian housing market with a good deal of scepticism. Even if prices don't collapse, it's hard to make a case that it's going to keep going up. If I were an investor, I'd be looking at another asset class.

Dreaming Of Greek Island Villas

Different Spin

Just a weird, weird thought for today. Would you move to Greece?

I don't know if you've ever looked, but today Mrs. Pleiades showed me a bunch of photos of Real Estate available in Greek Islands. Hey, I'm no millionaire or anything, but you can dream. What caught my eye was the price tags on some of these gorgeous places. Take this one here in Ithaca, home of Odysseus. Or this seaside villa for 850k Euros. How about this 270k Euro cottage in Corfu? They're absolutely beautiful places. I know Greece is in a lot of turmoil but consider this for a moment. If you had a bit of money and you could own one of these sorts of places, and wouldn't starve and had all the amenities of a good life available, would it really matter to you that the Greek government is insolvent?

Apparently wealthy Germans flock to the Greek Islands.  guess it's their equivalent of the Gold Coast. You can see why. So it is hard not to imagine that the Germans get something out of Greece being a member of the European Union and by extension, a member of the Euro.

I've been pondering this tangle of facts all afternoon. People are busting a gut buying a 2 bedroom flat in Sydney. For the same money, you could theoretically buy an amazing piece on some Greek Island and just stare at the beauty all day and all night. Okay, I know you'd need some cashflow but the point is how good is a 2 bedroom flat in Chatswood or Pyrmont, let's say, compared to a villa on a Greek Island? If you need evidence that the Greeks really are in trouble, this has to be it; and in turn if there's any evidence that Australian property is way, way overpriced, then this must be it.

But it cuts in all sorts of different ways. Imagine being a poor Greek person. If all this was around you and you couldn't buy in because foreigners came all the time to buy it out, why the hell would you stay? No wonder they like the European union where they can get to work anywhere. If they got kicked out of the Euro zone, they would still have their real estate bought up by foreigners, but they would lose that freedom to go work anywhere in the Eurozone. No wonder the polls in Greece say they don't want to quit the Eurozone.

It would be a shame if the Euro were to implode as a result of all the debt woes and bad faith negotiations. The fall out from that is going to be awful. But maybe all those Island properties would become even more affordable - then what are you going to do? :)

UK As Defiant Problem Child

Hello Dave Cameron, Eurosceptic

I have to say movies are a lot less interesting than what's been going on in the world since the GFC first reared its head in August 2007, a full year before the credit crunch that brought about things like TARP and stimulus packages. Since then the chaos has moved on from banks to sovereign states that paid money to buy out these bad debts, with the PIIGS nations getting a hammering the bond trading markets.

This week saw some extraordinary developments whereby some of the EU nations moved for greater union as the UK chose to sit it out. It's a tricky thing, but basically David Cameron might have been the right man at the wrong place or the wrong man at the right place. Given the choice of wanting more of an input or less into the affairs of Europe, he chose to opt for less.

For Britain the benefit of the bargain in Brussels is far from clear. It took a good half-hour after the end of Mr Sarkozy's appearance for Mr Cameron to emerge and explain his action. The prime minister claimed he had taken a “tough decision but the right one” for British interests—particularly for its financial-services industry. In return for his agreement to change the EU treaties, Mr Cameron had wanted a number of safeguards for Britain. When he did not get them, he used his veto.

After much studied vagueness on his part about Britain's objectives, Mr Cameron's demand came down to a protocol that would ensure Britain would be given a veto on financial-services regulation (see PDF copy here). The British government has become convinced that the European Commission, usually a bastion of liberalism in Europe, has been issuing regulations hostile to the City of London under the influence of its French single-market commissioner, Michel Barnier. And yet strangely, given the accusation that Brussels was taking aim at the heart of the British economy, almost all of the new rules issued so far have been passed with British approval (albeit after much bitter backroom fighting). Tactically, too, it seemed odd to make a stand in defence of the financiers that politicians, both in Britain and across the rest of European, prefer to denounce.

Mr Cameron said he is “relaxed” about the separation. The EU has always been about multiple speeds; he was glad Britain had stayed out of the euro and out of the passport-free Schengen area. He said that life in the EU, particularly the single market, will continue as normal. “We wish them well as we want the euro zone to sort out its problems, to achieve stability and growth that all of Europe needs.” The drawn faces of senior officials seemed to say otherwise.

That section is quite telling. Even prior to these meetings, it wasn't entirely clear what possible input the UK might have had given its history of not joining the monetary union. While that choice looks like a great choice in hindsight, it's also looking like the UK never really joined Europe in the way it was supposed to, so it now stands quite isolated.

As an Australian, the irony is rich, for the UK essentially had to abandon its preferred trade with Commonwealth nations in order to have access to the European markets and joining the EC, way back in the 1970s. That was one of the major changes that essentially push Australia towards embracing its Asian trade partners because it simply had no choice. In a sense the UK had to give up the baby to join the special club, only to find it didn't want to be a member of that club because it was more a cult, but now it has no baby.

As it turns out, giving up the portion of sovereignty that controls money is probably the least possible thing to do for the UK when you think about it. France, and Germany have lost their kings, and other royal families of Europe have long ceased to have any political or even significant economic power. This is in stark contrast to the United Kingdom that successfully (I wish I had a better word for it than successfully, but... you know what I mean) preserved its positively medieval monarchy with significant reserve powers. no Conservative government in the UK is going to hand over the controls to the treasury to a bunch of Republican Frogs and Gerries. And God save the Queen and all that.

So given these kinds of historic reasons, is it any surprise that Cameron chose to stay out of the room where important decisions will be made?

"He's thrown some meat to the eurosceptics who like to see the British PM wielding the veto. (But) it is going to make it harder to defend British interests," said Simon Tilford of the Centre for European Reform, a think tank in London.

"Cameron has played a bad hand poorly. He's been stung by the mounting rebellion here."
In Brussels, Germany failed in its campaign to persuade all 27 EU countries to write the tougher rules into the bloc's treaty, with just Britain and Hungary refusing to go along.

"Worried that Britain is starting to drift away from Europe in a serious way. To where? In a strong alliance with Hungary," Swedish Foreign Minister Carl Bildt said in a tweet on Friday. By lunchtime, even Hungary had changed its mind.

British Foreign Secretary William Hague played down London's isolation and tried to put a positive spin on the treaty clash, noting that different groups of EU nations had long worked together on various issues like defence and border controls.

"Decisions about the European single market, the thing that matters most to us for jobs and businesses in the UK, still have to be made by the 27 countries together," he told Sky News from Brussels. "We will be very vigilant about any threat to that."

Sort of amusing, that. Not surprisingly the moment been likened to Neville Chamberlain's moment in history waving a piece of paper saying "peace in our time". Europe's suddenly been over run by the threat of sovereign collapses with 'Merkozy' emerging as a kind of force for further unification. I have a hunch that says even if I don't like Cameron's side of politics, he may have made the right call for the UK. He would have come to rue the day if he had laid down the burning spears of desire and given over to 'Merkozy'. I mean, what would Winston Churchill have done? Blood Sweat and Tears, right? So while Cameron is likely to cop a walloping for his defiance, I suspect history will prove to be kinder to him.

What The Hell Are They Thinking In Athens?

More Drama Than Drachma

I'm trying to get my head around the logic of why (oh why) the Prime Minister of Greece George Papendreou would propose a referendum on the rescue package.

First Mr Papandreou had to confront a hostile cabinet (although it has since endorsed the idea of a referendum). Then he faced the threat of a rebellion by his Panhellenic Socialist Movement (Pasok). And on November 2nd he will miss the opening session of a three-day confidence debate in parliament: Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, have summoned Mr Papandreou to emergency talks in Cannes. They will try to dissuade him from what one western European observer called “political suicide and financial ruin for Greece”.

Pasok lawmakers erupted in fury at the idea of a referendum, which may be held as early as December, but could not happen at all if the Greek government loses the vote of confidence. Two socialist backbenchers said they would henceforth sit as independents, reducing the party’s parliamentary majority to a bare minimum of 151 seats in the 300-member chamber. A third socialist deputy, former development minister Vasso Papandreou (no relation), said she had asked Greek’s president Carolos Papoulias to call a meeting to organise a government of national unity. It would push through fiscal and structural reforms, then take the country to elections. “Greece faces imminent bankruptcy,” Ms Papandreou warned. Separately, six veteran Pasok members urged the prime minister to resign, saying he was “taking Greece back to the 1950s”—a grim period in the country’s history, which was marked by widespread poverty and mass emigration.

Politicians from both sides of the aisle have joined the call for a snap election. Antonis Samaras, leader of New Democracy, the conservative opposition party, said that elections are “a national imperative”. A referendum “would put the country and the future of Europe at risk”. Alexis Tsipras, leader of the leftwing Syriza faction, also called for elections, saying Mr Papandreou “is finally being dragged to the polls under asphyxiating popular pressure, but it will be an election, not a referendum.”

It's a real head-scratcher as to what he thinks such a referendum would achieve, but off he goes, mouthing off this referendum. Naturally stocks took a nose dive everywhere, which is neither here nor there; although I really do want to point out that even if it doesn't look like altruism, the European Union is going a considerable way towards trying to bail out a reckless Greek government that went and squandered what it borrowed. It might not look like it but Sarkozy and Merkel went to great lengths to hammer out an agreement to ave Greece from itself. Now Papendeou has taken that fragile agreement and tossed it to the dogs, so to speak. And by dogs I mean those people baying for a change in Greece just so it doesn't have to go through with the austerity measures. It's a bit like he's gone and metaphorically spat in people's faces, now that he's secured agreements from them to save his metaphorical house on fire.

And I'm asking myself, what rational reason could he give for throwing all of that out the window? What the hell is he thinking? Is he seriously thinking it's a realistic choice to let the people decide and if the people decide to default, then history would somehow absolve him? Because if that's the idea, he's not only out of his depth, he's out of his tree.

China In The Spotlight

More Than Reading Tea Leaves

Okay, non-movie related entry today. Sorry guys, but this stuff keeps being so interesting, so bear with me.

Time Magazine had this article today, pondering the likelihood of China being able to help out Europe as the global financial crisis part 2 unfolds.

China certainly has the cash on hand ($3 trillion in foreign exchange reserves) to make a difference. It also seemingly has a strong interest in keeping global markets afloat. But that wasn't the take I got at a lunch this week in Hong Kong with a regional banker, an economist, and a Hong Kong politician.

For one thing, frugal Chinese citizens aren't keen on spending their country's savings to bail out profligate Europeans, they said. Beijing is already under enough pressure to spend more of its export cash on its own people. The government and China's sovereign wealth funds also aren't sold on the idea. That's partly because China doesn't feel as vulnerable to Europe's debt crisis as we might think.

That sounds oddly familiar. For one thing, the Germans don't want to spend the money to bail out the profligate Greeks but in their instance it can be argued that they should seeing that the Euro actually keeps Germany sheltered from a much more fluctuating and volatile currency. Some have done the sums and think that a re-issued Deutschmark would appreciate 30% above where the Germans are trading, putting a massive dent in their exports.  So an argument can be made that the lazy Greeks are in part keeping the Germans in business, even if they owe too much money.

Furthermore, there's this interesting article here.

The concerns about Europe's banks have been simmering in the background for some time. Economists have warned that at the core of the euro zone crisis is an unstable support system: Poorly capitalized banks were holding up poorly financed governments, which in turn were expected to back the poorly capitalized banks. As the sovereign debt crisis has escalated, sucking in giant Italy, those fears have only inched closer to becoming reality. Many influential voices have proclaimed that Europe's banks just don't' have the level of capital necessary to withstand a one-two punch of slowing growth and widening debt crisis. They could end up taking a massive smack from losses on their holdings of European sovereign debt.

Right. And when the European banks start really failing, what is that going to do to Europe which is China's great export market? Hot on the heels of that article is this article here in Yahoo7.

"Everyone is getting more concerned about risks accumulating domestically (in China)" said Ju Wang, a fixed income strategist at Barclays Capital in Singapore.

The implications for Australia are huge. Although BHP Billiton and Rio Tinto have both issued bullish statements about demand from China for our natural resources booming for at least another decade, experts say that producers such as our miners are often the last to know when demand from customers falls off a cliff.

If China's property market continues to fall, building will stop abruptly and demand for Australian iron ore will plummet because most of our goods go towards building China's infrastructure.

"This is certainly a big issue and one we cannot afford to be complacent about" said Shane Oliver, chief economist at AMP Capital.

"The biggest concern are the loans from outside the banking sector that fuelled the property boom. But there are risks across the economy and it could have a big impact on our exports. China needs to look at loosening monetary policy sooner rather than later to help stop so many investors borrowing from unregulated lenders."

In other words, China actually needs Europe to sort out this Greek sovereign debt mess because if it doesn't, it has as much to lose in the ensuing global recession. One can't say with any confidence that wise heads will prevail in the Euro debate or the US policy debate, let alone who-know-what that passes for policy setting in Beijing. So strap yourselves in for the double-dip recession and hope like hell it doesn't devolve in to wars and destroy the world.

The Dark Crystal Ball Says...

This one is from Pleiades, and everybody who is vaguely interested in where things are likely to go should have a read of it.

Unless Germany moves quickly to reverse its current account surplus – which is very unlikely – the European crisis will force a sharp balance-of-trade adjustment onto Germany, which will cause its economy to slow sharply and even to contract. By 2015-16 German economic performance will be much worse than that of France and the UK.
If Germany does not take radical steps to push its current account surplus into deficit, the brunt of the European adjustment will fall on the deficit countries with a sharp decrease in domestic demand. This is what the world means when it insists that these countries “tighten their belts”.

If the deficit countries of Europe do not intervene in trade, they will bear the full employment impact of that drop in demand – i.e. unemployment will continue to rise. If they do intervene, they will force the brunt of the adjustment onto Germany and Germany will suffer the employment consequences.

For one or two years the deficit countries will try to bear the full brunt of the adjustment while Germany scolds and cajoles from the side. Eventually they will be unable politically to accept the necessary high unemployment and they will intervene in trade – almost certainly by abandoning the euro and devaluing. In that case they automatically push the brunt of the adjustment onto the surplus countries, i.e. Germany, and German unemployment will rise. I don’t know how soon this will happen, but remember that in global demand contractions it is the surplus countries who always suffer the most. I don’t see why this time will be any different.

About a week after I set down these “predictions”, and two days after I finished this point, I saw in the Financial Times that German growth has already hit a wall. Expect to see a lot more articles like this over the next few years.

The rest of the article makes for fascinating reading.

I was thinking the other day that there is far more debt than there is money in the economies all combined. So at some point somebody is going to be stuck with the un-payable debt, and that will lead to all kinds of conflict. There's really nowhere to run in the markets or even outside of it. The money you hold might evaporate in policy-led inflation; the assets you hold might devalue severely. The governments you vote in might have to tax you harder than you thought. And none of this would add up to what would be enough.

Ultimately we're going to end up like Argentina in the late 1990s. You wouldn't be able to insure anything because insurance companies will die back. All those Woody Allen jokes about insurance salesmen will sound quaint on that day. It's all in the cards. We live in interesting times, that's for sure.