A world built on debt does not have a solid foundation. A world built on sound money, secure private property, and a predictable rule of law DOES have a solid foundation (as our new friend Ron Kitching pointed out earlier this week). We do not live a world with solid financial foundations. That’s what makes investing so dangerous today.
Later in today’s Daily Reckoning we’re going to reject the heinous and misguided accusation of doom-mongering levied against us via a profanity laced e-mail tirade. But first, to the markets and the local scene. And there’s some catching up to do on one of those shaky, debt-based pillars of Australian financial life, the housing market.
First up is the news that mortgage lending is falling while house prices continue to rise. “Total mortgage applications fell 15 per cent in March quarter compared with the corresponding period a year earlier, the quarterly consumer credit demand index by consumer credit check company Veda Advantage showed,” according to today’ Age.
Cris Cration of Veda said, “One consequence of a withdrawal in government incentives is a relatively sharp drop off in housing credit demand in 2010.” Those “incentives” are the first home buyer’s grants. Mortgage data provider Australian Finance Group says first home buyers have declined as a percentage of the new mortgage market from 28% last year to 10% this year.
Once you bring forward all that demand…what then? You get now. Let us call it the “demand gap!” People who would have otherwise patiently built up a deposit and bought a home at a time that suited their finances are “brought forward” like reinforcements into the battle line. So who is going to get shot?
Well, let’s say you got yourself a mortgage six months ago when the RBA lowered the cash rate to 3%. The standard variable rate from any of the Big Four banks would have been higher than that. But let’s say you want to refinance today (because you believe rates are rising) into a 15-year fixed rate mortgage. According to the rates at one major bank site we checked, the rate on a 15-year fixed mortgage is about 8.54%.
So, if you’re a first home buyer worried about an interest rate shock from rising rates and you want to lock in some stability, we reckon you’re likely to pay nearly double the rate you got into your mortgage. And that would probably be pretty stressful. Of course if you think interest rates are not going up, then you wouldn’t refinance and lock yourself into a fixed rate.
All of which shows you how Australia’s preference for variable rate loans coupled with central bankers rigging the price of money can turn a whole economy into a giant exercise in speculation. You make the biggest financial decision of your life based on factors that are influenced by unpredictable changes in the cost of money and the rate of inflation. Sounds like how you’d design a system to put people into debt to the bank and keep them there for decades.
But only if rates move up, which they very well may be next week when the Reserve Bank of Australia meets to set the price of money. Based on the consumer price inflation data released yesterday (up 0.9% in the March quarter) annual Aussie inflation is running at the upper end of the RBA’s tolerance/target of 3%. The IMF says in its Asia Pacific Regional Economic Outlook yesterday that the RBA will have to put up rates this year as Aussie GDP rebounds.
Incidentally, we had a quick scan of the report, which you can find here. A couple of charts caught the eye. First, you can see from the IMF chart below that housing credit as a percentage of GDP is higher in Australia and New Zealand than anywhere else on the chart (and probably in the world). And the total amount of credit is dominated by housing in the Anglosphere countries, reflecting… something about their fascination with the idea of getting rich from houses, although to be fair, the banks (the ones that survived the credit crunch) HAVE gotten rich.
The second chart, below, shows that while Aussie banks (mostly the Big Four) have gone on a lending binge, the provision of credit to the corporate sector fell off a cliff. Big listed firms managed to raise equity last year (although not always in ways that boosted shareholder value, given the cost and return on capital). But smaller firms have been cut off by Aussie banks, according to the chart below.
Robert Gottliebsen made this point quite clearly today at Business Spectator when he wrote, “The Australian banking industry, as it is presently structured, is unable to fund the needs of small and medium-sized businesses.” He the quotes from a UBS report we haven’t seen about Australia’s reliance in imported foreign capital (when you’re a debt junkie, any hit will do).
“As UBS research shows,” Gottliebsen writes, ” Australian growth in loans to both the housing and business market have been funded by overseas lenders. According to UBS, Australian banks are getting close to the upper limit of loans that overseas institutions are likely to provide to Australia. And worse still – as ANZ points out – the European crisis could contract the amount of loan money available to Australia and lift its cost.”
Ah yes. Greece and loan losses. ANZ’s Mike Smith got on the front with the issue in the press today, including his own handy new term to describe Greece: “a rogue sovereign.” The ABC reports that Smith said, “Europe is a mess and the sovereign issues have not been addressed with clarity…The uncertainty has continued and that’s probably going to get worse. The contagion issue is now very real.”
The end result, he added, is a higher price for money for Australians. “That’s where it will impact us. In terms of the funding that the Australian banks have, in terms of their wholesale funding, obviously credit spreads are going to be more volatile.” Hmmn.
Pop quiz! How do you kill Australia’s most vital industry, its mining sector? You plunder it, that’s how!
The plunder begins on Sunday when the Rudd government finally unveils the Henry Review of Taxation, which, by all accounts, is likely to include a new federal resource “rent” tax to go alongside the royalties miners must already pay the States. The government could not have chosen a more apt word than rent. The government is the ultimate rent seeker.
Investopedia defines “rent seeking” as, “When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.” Frederic Bastiat calls this kind of rent seeking a form of legalised plunder, and rightly so. His description distinguishes how the government raises revenue from how entrepreneurs raise revenue, by making a profit.
Profit-seeking behaviour creates a lot of things: surplus, jobs, incomes, goods, and services. And for a company to produce a profit it must serve its ultimate master: the customer. Profit-seeking serves customers. Rent-seeking is the legally-backed coercive cudgel of Canberra.
But one of our friends out in Perth – a man who works in the mining industry – put the case against resource rents far better than we could in a letter to the editor that we believe was published by the Australian Financial Review. He wrote:
Our WA Premier has said:
“BHPB and Rio fully understand … it is part of their corporate and social responsibility to pay their way.”
“The mining royalty, the $40m that will be collected from this project, is not a tax – it is the price at which the people of Western Australia sell the gold.”
This tired clichés of socialism are also blatant double talk from our Premier.
There is no such thing as an Iron, Gold or any other mine until entrepreneurs explore for it then plan and build a mining operation which separates the mineral or element from the rock. All of this human action organised profitably by the private sector.
Royalties are an additional impediment. They are legalised plunder.
Bastiat wrote in his book The Law: “See whether the [said] Law takes from some persons that which belongs to them, to give to others what does not belong to them” and his further determination was to “abolish this [said] Law”.
All WA people are free to invest and purchase equity in a privately run Mining company if they so desire, before and or after a discovery and thus participate in the wealth creation.
In many cases the legal plunder or “Royalties” render the operation non-viable, and so destroy jobs, production and profits.
This issue of royalty increases makes one ashamed to be an Australian; fancy living off of others hard work.
M.N.
Couldn’t have said it better. This brings us to the final part of today’s Daily Reckoning on who the real heroes of the free market (not the capitalists, not the bankers, and not the regulators). But we’ll preface it with a letter we received yesterday. Apologies in advance for the blue language:
You &^%#ing doom and gloom merchants. I am sick to death of your negative projections whereby daily you drum up bearish sentiment with glee as though your ego would be happy to see a complete financial collapse so then you could say to everyone – see I was right, see look how clever I am. You are *&%#ing stupid that is all you are. You have been waiting for an excuse, any excuse to say see I told you the sky was going to fall in.
What sort of impact does it have when you and other scammers with your $#!&ty little gold positions bang on and on that things are &#@%ed? That’s right the prophecy becomes self fulfilling when a critical mass is reached.
Well done I hope you are proud of the destructive role, as opposed to creative, you have chosen to fill in this great endeavour we call humanity.
Take me off your list, don’t mail me &#it all day every day and get a life you losers.
With all due respect, we think the reader misunderstands our intentions with the Daily Reckoning. It’s just a reckoning. Lately, that means reckoning up all the badly allocated capital, human fraud, misguided public policy, and good old fashioned greed. When you reckon all that up, the sensible investment position is to be really, really, really cautions and highly (eternally) sceptical.
But that is not a hereditary disposition. It’s just the position we think makes sense. Hereditarily – or really by choice – we are joyful optimists! Economic and political liberty combined have the power to unleash an astonishing variety of human potential, from the Mona Lisa to the Sham Wow!
That’s why the great heroes of the Austrian School of Economics are the entrepreneurs. They are the creators who bring new things into the world with their energy and skill and dedication. They might do it with other’s capital (the bankers, capitalists, and investors). But it’s the entrepreneurs who are always on the frontier of economic experience, looking for a new way to use resources better, more efficiently, or chase whatever their particular passion or vision is.
But those entrepreneurs have many obstacles to overcome these days, from competition to regulation to the equity markets being hijacked by financial capitalists who pursue financial gain alone rather than the funding of enterprise. We don’t live in a world with free enterprise at all, and perhaps never will.
But we shouldn’t forget that the great achievement of the free enterprise system is that without any centralised direction or organisation – it manages to harness noble and ignoble human passions to produce choice and prosperity for millions of people. And with a fair and stable legal framework, that’s a kind of real justice that the plundering central planners out for social justice can never even come close to delivering.
So no, we’re not trying to be clever and revel in the demise of the financial system. But we do think if you want survive the collapse of this system – a system based on debt, unsustainable finances, and a rotten moral premise of theft – you had better be willing to face facts and then make a plan and then make a life. If you don’t, you’re going to be the real loser.
Dan Denning
for The Daily Reckoning Australia
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