Pete Wargent blogspot


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Monday, 10 December 2018

Jobs market defying gravity

Different here

'Uncharted territory' says the RBA, a phenomenon not seen anywhere in the world: a decent fall in house prices, solid growth in the economy, and falling unemployment. 

Well, let's see, but employment growth still appears to be defying gravity for now.

Roy Morgan reported employment up by +408,000 over the year to November 2018. 

Lots of part-time jobs in that total, though, and the latest new auto sales figures were a total bloodbath, with the New South Wales figures getting roundly hammered. 

The final ABS update on the labour force for 2018 is due out next week, and will command a huge level of attention. 

You've changed...

A thought for the week ahead!

Sunday, 9 December 2018

Pendulum swings

Forensic analysis

Back in my auditing days in London, as a trainee I had to do my tour of duty in the forensic accounting department. 

It's one of things that sounds a little bit exciting, and the people were great, but being involved in a fraud investigation I never found to be much fun.

Naturally, everyone is on edge - even people that have no reason to be - and the accounting concept of materiality doesn't apply in the same way.

Anything could prove to be material, so every transaction must be investigated on a painstaking, line-by-line basis.

Notably the process becomes almost as important as the result, and invariably the investigations drag on for months as ever further documentation and explanations are sought. 

Pendulum swings tighter

I've spoken before about the concept of the credit cycle as a pendulum, rarely stationary in an a neutral position, and instead typically swinging towards too loose or too tight. 

The AFR has reported more than once this week on the forensic analysis of mortgage applications, including borrowers with substantial 30 per cent deposits being refused a loan for having Netflix account membership, or for using Uber Eats. 

I've also come across high income earners with low debt turned being down for a loan because they'd previously signed up for a credit card to earn loyalty points. 

Here's how respected industry experts are reporting what they're seeing, and that one key word keeps coming up: forensic (check out the link - auditing of $20 expenses! Crazy times). 

Nobody wants to see reckless lending, but this level of analysis would have to be short-lived. 

Checking $20 payments is adding nothing worthwhile or of any value when lenders are already using a default assessment rate of 7.25 per cent. 

If you're borrowing at a 4 and being stress-tested at a 7, who cares if you watch Netflix? 

The way the forward-looking indicators such as money growth and building approvals are tracking we may not see mortgage rates that high in half a generation, let alone in the half a decade or so it takes for borrowers to make inroads into their loan and for incomes to increase.

I think back for a moment to when I bought my first home in Sydney.

Under today's rules I might well have been refused a loan despite having a strong income and secure employment, since like a lot of people in my twenties in Bondi I ate takeaways and...well, we didn't have Netflix back then, but going to bars, cinemas, and restaurants would've featured prominently.

My lender acknowledged that my spending profile after I bought a home would adjust accordingly, and the risk of mortgage arrears was always minimal. 

Arrears in focus

Non-conforming and low-doc loans were rightly recognised as a risk area during and after the financial crisis, and standards here have been tightened accordingly, with arrears today at the lowest level in history. 

Note that 30+ day mortgage arrears for investors are tracking comfortably below the level seen for owner-occupiers, at about 1.2 per cent (ironically the recent increase here is at least partly due to tightened lending to portfolio investors with multiple interest-only mortgages). 

And in the supposed problem states of New South Wales and Victoria 30+ day arrears for all mortgages are only about 1 per cent. 

The wrap

With many mortgages now taking up to six weeks or more to be processed the housing finance figures to be released this week for the month of October could yet post a small bounce as applications lodged a couple of months ago finally flow through.

That said the median market forecast is for another modest decline; and that's following on from an exceptionally weak result for September.

Investor credit growth has already been crunched to the lowest level on record. 

More detail on the figures for October tomorrow.

Saturday, 8 December 2018

Spending shifts to online

Retail steady

Retail turnover increased by a seasonally adjusted 0.3 per cent to $27 billion in October 2018.

The household saving ratio has declined, as should happen with lower interest rates, and this in turn has been reflected in modest annual growth in retail turnover of 3.6 per cent. 

Department stores hurting

At this stage of the housing market cycle we should expect some migratory shifts towards south-east Queensland, and to some extent this was reflected in the monthly retail turnover figures for New South Wales (-0.4 per cent) and Queensland (+1.1 per cent).

Adverse weather did negatively impact the results for some New South Wales industries in October, with the annual growth in retail turnover now being championed by Victoria and Tasmania. 

Online spend

Not a remarkable set of numbers, overall, then.

The most interesting point was that online retail turnover contributed some 5.9 per cent of retail turnover this month, representing a rapid ascendancy from only 4.7 per cent a year earlier. 

Consumers and stock market investors should take note of the continued poor performance of department stores, as the arrival Amazon Australia and other low-cost retailers puts further pressure on margins. 

There is a long and growing list of retail failures in Australia. 

But as the headline figures show, this doesn't mean people aren't spending; they are spending, but in a different way. 

Must see articles of the week (and program offer)

Weekend reads

Here are your weekend reads from Property Update (click the link or the image below), including a property market review of the calendar year to date, and an up-to-date look at what's happening with stock listings. 

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Epic Bitcoin plunge

Annus horribilis

At the beginning of the year the top 20 cryptocurrencies - yes, there are very many of these things - had a staggering market cap of well over US$½ trillion. 

Today that figure shrunk to just $90 billion, an epic drop of well over 80 per cent. 

It's been an especially tumultuous year for Bitcoin Cash (-96 per cent), Litecoin (-88 pr cent), Ethereum (-87 per cent), as well as some others I've never heard of. 

Relatively speaking Bitcoin itself has outperformed, down by 77 per cent so far this year.  

From its heady peak Bitcoin is down 83 per cent at the time of writing, notching fresh 2018 lows today. 

Last year Bitcoin recorded price gains over well over 1300 per cent. 

US record expansion continues

Jobs growth continues

US nonfarm payrolls notched a 98th consecutive month of gains at a hopefully more sustainable +155,000 in November, with modest downward revisions to preceding months (-12,000) slowing the 3-month average nofarm payrolls gain a little to ~170,000.

The result missed market expectations, but perhaps steadier employment growth shouldn't be unexpected after a record 8 years and 2 months of unbroken gains. 

The unemployment rate held at 3.7 per cent for a third month.

In fact, the unemployment rate fell from 3.74 per cent to just 3.67 per cent this month, for fans of additional decimal places.

There was growing evidence that this is pulling less advantaged Americans into employment, which is why continued expansion remains so important. 

The unemployment rate for those with only a high school diploma falling to levels last seen at the beginning of this century at just 3½ per cent, following on from consistently improved results for those without high school qualifications. 

Food for thought while Australia pursues its 'financial stability' alternative route! 

Average hourly earnings were up by 0.2 per cent for the month and 3.1 per cent for the year, translating only to modest real wage gains for now (partly due to high oil prices, which should change in due course). 

Treasury yields dipped a bit initially, but at first blush there's nothing in this report to stop a Fed hike in December.

The good news is that there was little sign of overheating or a risk of runaway inflation, with steadier employment gains being recorded. 

Friday, 7 December 2018

Whatever it takes

The GFC: 10 years on

Corker of a speech from the Reserve Bank's Debelle yesterday where he revisited the global financial crisis, how it appeared to play out in real time, and what lessons can be learned about liquidity and response measures.

Australia pulled through the global financial crisis in far better nick than most other advanced economies, explained Debelle, thanks to a combination of factors and policy responses.

This considered speech inevitably attracted a lot of airtime because it made reference to QE (quantitative easing) as an available policy tool. 

However, this is one of those times to read what the relatively sanguine speech actually said rather than how it gets interpreted across various media channels!

Whatever it takes (5 measures)

I often get asked what would happen if the economy and housing markets really turn to mush, which is a reasonable enough question to ask for those with a long-term horizon.

If you're interested this is a very useful speech to pick through, as many of the answers are touched upon, with the overriding message being that liquidity is vital.

It's important to note at the outset that the Reserve Bank still believes that the next move in the policy rate is up, whatever proves to be reported about this speech in the media. 

This may prove to be true, although the latest OIS pricing doesn't suggest that this necessarily means any time soon.

Source: Martin Whetton, ANZ

If required, however, there is scope for further reductions in the policy rate. 

So that's one measure: a cash rate being cut closer to the zero lower bound. 

Secondly, there is quantitative easing as a policy option in Australia, as used by some other countries during the crisis (while acknowledging an important point: that the traction in Australia is mostly at the short end of the curve, rather than at the long end of the curve, which might limit the effectiveness of QE here).

We already know that the Reserve Bank can also expand its balance sheet, which is a third possible policy measure. 

Fourth, Australia is fortunate because it has relatively low government debt - as well as a Federal Budget now back in balance - so there is ample scope for fiscal stimulus, which is something we did see plenty of during the Rudd years. 

And, fifth, the floating Aussie dollar can continue to act as a shock absorber, as it has done for the past 35 years (happy anniversary this week, by the way!). 

The key point, noted Debelle in an analogy, is to understand the plumbing and to keep the credit pipes flowing. In his own words:

'In a crisis, go fast and go hard. Don't die wondering'.

Apartment construction collapsing

As a real estate advocate I'm duty-bound to point out one quibble, that Australia is apparently unique in reducing its housing prices with falling unemployment. 

This may be true in real time, but of course unemployment is a lagging indicator, and you can only squeeze lending so far before there's a knock-on impact to construction employment and consumption (in all fairness this has been acknowledged; it's simply a matter of degree rather than principle). 

The Reserve Bank has itself previously estimated that of construction employees - of which there are about 1.1 million or so in Australia - around ¾ are directly employed in the residential sector. 

New apartment sales have utterly dried up, and AiG's Construction Index released earlier today contracted to its weakest level in years on November with a reading of 44.5, and with apartment construction collapsing to a dire reading of just 31.0. 

Source: AIG

Granted, it's not all gloomy news in the construction sector.

Indeed, there are cost pressures relating to some resources and infrastructure projects as employers have struggled to fill skilled vacancies away from the major employment hubs.

My sense is that it will take some meaningful pay packages to drag workers to go FIFO or regional again, so this could push wages in some parts of the the construction sector higher. 

Overall, a very interesting speech, and well worth a read!