Pete Wargent blogspot


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Friday 31 January 2020

Credit growth slides to 117-month low

Housing off the mat

Domestic credit growth of +0.2 per cent in December 2019 wasn't enough to stop annual credit growth slumping to the lowest level in 117 months at just +2.41 per cent, as Australia flirts with recession-like conditions in early 2020. 

Business credit growth (+2.5 per cent) and personal credit growth (-5.1 per cent) remained notably weak, even if the data series has evidently been disrupted by FinTech. 

Housing credit is off the mat, though, bouncing off multi-decade lows towards the end of the year to +3.1 per cent. 

Investor credit growth was running at a record low over the year to December, sitting in negative territory, with the rebound all having been driven by homebuyers. 

Early indications suggest comfortable double digit housing price growth in the capital cities in 2020.

Investors are likely to return to the market in 2020 after a two-year hiatus.

The #experts tell me that interest rates must be kept on hold to keep a lid on excessive credit growth (!), yet we've never seen credit growth as low as this outside of the early 1990s recession and the GFC.

I’d roll out the Goodfellas gif if it hadn’t been done so many times before.

And, by the way, global growth is in the midst of a nasty demand shock, at a time when global growth was already soft, with global trade contracting. 

Stronger wages growth a pipe dream

Stuck in a rut

It's true that I've been whining about policy a lot - low grade Twitter discussion tends to drag one into it! - but it's desperately hard to see where the predicted stronger income growth is actually going to come from. 

A 30-second look through yesterday's ABS releases underscores why, bearing in mind that NAIRU may well be about 4 per cent:

Unemployment rates are now rising in Sydney and Melbourne, and are already way high everywhere else. 

Meanwhile the median duration of job search has jumped to 17 weeks, up from 14 weeks a year earlier. 

And the annual average number of unemployed persons was back above 700,000 by the end of the 2019 calendar year, representing no progress at all from a year earlier.

It's tough, then, to see the forecast stronger wages growth with so much slack in the labour force, especially given the...

Terms of trade plunge

Export prices had a tremendous run through much of 2019, but plunged 5.2 per cent in the December quarter. 

The index for coal and coke plummeted 14.7 per cent in the December quarter alone.

Q4 was ugly in this regard, but the beginning of 2020 could be much worse given recent trends in iron ore, natural gas, copper, and crude oil, all of which are plunging alongside a range of other commodity prices.

Just 31 days into calendar year 2020 and the Bloomberg commodity price index has just nudged a 47-month low. 

The wrap

Some of the jobs data has held up better than might have been expected.

However, confidence and investment plans have been shredded, job ads are falling at a double digit pace, and the coronavirus and bushfires are going to drill a further gaping hole in already-anaemic growth.

Nicht so gut!

Thursday 30 January 2020

Battle of wills

Mandate in the spotlight

A thread of thoughts on the February 2020 interest rate decision, from none other than Adam Smith:

This topic has generated reams of debate over the past five years, with inflation continuing to undershoot

Does the Reserve Bank still care about the inflation target as much as it used to?

The February policy decision is due for release on Tuesday afternoon.

Oil hits the skids

Out of favour

Energy has been one of the most hated sectors over the past three years, and indeed for 5 of the past 6 years.

Source: Novel Investor

Over the past dozen years, energy has been a serious laggard, and this trend has been gathering further pace on the back of the ESG tsunami and the growing imperative for institutional investor virtue-signalling.

The other US sector that's had a torrid dozen years has been financials.

With the coronavirus spreading, oil looks like to get walloped even further as travel is banned.

Source: Bloomberg

Of course, this is a 'value' style of investing which tends to work well over a 10-20 year timeframe, rather than seeking out short-term momentum.

I'm all for buying Aussie companies - or the Aussie indexes - when they're cheaper, but at today's prices...well, it's not for me. 

In the more immediate term, let's hope this wretched virus gets under control!


Tesla (NASDAQ: TSLA) is looking for a market open at around $650 (!) after a Q4 earnings beat, sending the market cap hurtling towards US$120 billion.

I'm not even going to spend any time on the multiples...stock price, bro! 

First homebuyer boom incoming (another 10,000 slots)

FHB boom

3,000 potential first homebuyers were registered by banks in the month of January.

That leaves 7,000 places for the First Home Loan Deposit Scheme (FHLDS) available from 1 February 2020.

25 smaller lenders will join the Scheme’s lending panel on 1 February.

Note that a further 10,000 places will be made available from 1 July 2020, according to the NHFIC.

The early indicators of take-up for the FHLDS appear to be solid, suggesting that first homebuyers have taken note of rising prices since June 2019.

This will add a sense of urgency for first-timers, and will likely send the number of first homebuyers in the market to the highest level since RuddPrime the tail-end of the Rudd stimulus.

Wednesday 29 January 2020

Inflation misses again, again...

Inflation below target

Reading the inflation previews this week was jarring, with most summarising that underlying inflation would be weak (it was), but markets wouldn't care much about the release regardless (they didn't).

As expected, there was a bit of a supply shock from the drought, which brought about some food inflation via meat, milk, and fruit prices.

And there was the obligatory price increase via the 12.5 per cent tobacco excise, alongside fuel this quarter.

There were, however, negative contributions from furnishings, clothing, and more. 

Overall, the increase in tobacco, fuel, and food prices lifted the headline figure to +0.7 per cent for the quarter, and the annual result to +1.8 per cent, leading markets to see interest rates on hold in February. 

The underlying or analytical measures were yet again very weak, though.

For the wonks:

Underlying inflation slowed a little to +1.42 per cent, and hasn't been squarely in the target 2-3 per cent band since 2015.

Meanwhile, the housing group showed almost zero inflation, with rental CPI at the lowest level we've seen.

I used to write more in-depth analysis of inflation figures elsewhere, but there's no need these days since James Foster does it all for you here

There'll likely be an ongoing impact on food prices from bushfires into the first quarter of 2020, with apparently little prospect of the economy running much closer to its potential.

National Australia Bank and Deutsche still think interest rates will be cut in February, but others - including Bill Evans of Westpac - think there will be a pause for a few months.

There's not exactly much to fear from lower rates, given that many households are using lower mortgage rates to deleverage, and debt to income ratios are now falling. 

Tuesday 28 January 2020

Property bubble trouble?


A podcast we recorded last year when all the talk was about a property price crash - the opposite of what we were seeing in real time - tune in here or click on the image below:

Early indications suggest to me that Sydney property will comfortably do double-digit price growth in 2020.

I expect Melbourne will probably do the same, and the same again for certain property types and locations in Brisbane. 

There's so little stock, and masses of pent-up demand, while the first home loan deposit scheme (FHLDS) will add further to demand.

You can subscribe for the free Yardney podcast here

The problem with average returns

Don't be average

I discussed the problem with average returns in the short video here (or click the image below):

Sunday 26 January 2020

Buckle up

Lunar NY cancelled?

Lunar New Year to be cancelled? Or perhaps it will be extended.

When it comes to epidemics and potential epidemics - think SARS, Ebola - it usually pays to go to reliable sources of information.

Be wary of deliberately exaggerated reporting, but also alert to the risk of a pandemic. 

China itself has declared 2,000 cases of the coronavirus, and is reportedly building a new 1,000-bed hospital due for completion in - *check notes* - one week.

China data is usually treated with a healthy dose of scepticism, of course.

By the way, there are now 810 million urban Chinese, and, these days, they travel more.

The locking down of cities and transport options, the use of military forces, and the banning of some travel suggests that the virus is considered to be a very serious threat.

And then there's this, via the ABC:

Over the January/February period last year Australia had - *checks notes* - 349,100 short-term visitors from China. 

Including Taiwan and Hong Kong the total was 433,700.

These figures are in addition to the usual thousands of permanent migrants.

This is bearish for: crude oil, Aussie iron ore and coal exports, Chinese consumption, global and Aussie stocks, and risk sentiment more generally. 

Assume the brace position, there may be turbulence ahead!

Devil take the hindmost

Crowd wisdom or madness?

Here's how to tell when the crowd is right and markets are efficient, and when the crowd is suffering from popular delusion (or click on the image below):

Saturday 25 January 2020

Weekend reads

Must see articles

This week a look here at Property Update at home buying intentions and the suburbs set for a boost (or click on the image below):

You can subscribe for the free podcast here, including a listen to my latest contribution here.

Friday 24 January 2020

What are your expected returns?

Expected returns

What are your expected returns?

See here for more (or click the image below):

RBA to hold fire in February

Cut and dried

Unemployment fell back to 5.1 per cent in February on a further rash of part-time jobs, taking pressure off the February interest rate decision, although major bank economists still see further cuts ahead.

Westpac is still forecasting two further cuts, in April and August, with consumer sentiment in the doldrums, while futures markets are also still pricing further easing, but possibly not for some months to come.

After missing the mandated target for years since 2015, inflation had begun drifting even lower.

Paradoxically, however, inflation may now at least temporarily spike towards the target range as a result of the recent natural disasters, including bushfires and drought. 

On the other hand, oil prices have been crunched 14 per cent lower since January 6, so perhaps not.

Meanwhile, the economy has almost completely stalled, with most of the indicators for employment growth (such as job advertisements) weakening sharply, leading Westpac to forecast the unemployment rate rising to 5.6 per cent as soon as next quarter. 

Given that inflation is so far below target, and unemployment is expected to rise, another rate cut is priced in to lower the Aussie dollar and stimulate demand. 

According to some sections of the financial media the RBA should not ease further, because - you guessed it - Sydney house prices (again). 

Leverage and housing

When you look more closely at housing and leverage, though, there are clear reasons why the RBA could still cut.

Firstly, lower rates are actually helping to reduce excess leverage now, as households can extinguish debt faster as well as consume more. 

Although lower mortgage rates allowed some households to leverage up, most of the increase in debt to income ratios happened before 2007 when interest rates were much higher, suggesting that other factors were at play, including financial deregulation and the resources boom. 

In any event, debt to income ratios are now falling (arguably they haven't increased all that much anyway, net of Australia's burgeoning use of offset facilities).

Faster wages growth would clearly help here, however, hence the importance of targeting full employment and reducing underutilisation from the presently elevated level. 

Housing credit growth is running at a 43-year low, underscoring the previous points.

And year-on-year investor credit growth is actually negative, which has never happened before, even in the darkest of recessions.

As for housing prices, the impact of interest rates on house prices isn't nearly as clear as often implied.

Asking prices in Perth are lower than they were a dozen years ago, as they are in Darwin - where asking prices are collapsing at an alarming and accelerating rate. 

Apartment prices also haven't increased in a decade in most of Brisbane, or even in some parts of Melbourne. 

Stock market froth

I'll concede that there may be some nascent stock market exuberance, but this has little to do with the RBA and everything to do with the US Federal Reserve injecting liquidity again, this time pumping a lazy US$500 billion into the repo market.

Even a casual observer or day trader would have noted how Aussie stock prices tend to mimic those of the US these days, with global returns becoming increasingly correlated with those of the US.

An interest rate cut can always be reversed should the Aussie economy overheat, however remote that possibility may seem. 

Margin call

Return of margin lending

Interesting note from David Taylor at the ABC, reporting the return of Aussie margin lending.

Total margin lending collapsed in an unseemly heap of margin calls after the December 2007 quarter, and never really came back.

Some of the margin lending has since been replaced by new forms of leverage such as Contracts for Difference (CFDs).

And, as it turns out, some margin lending apparently wasn't being captured.

The Reserve Bank's latest figures show the clear series break in the September 2019 quarter, with total lending quite a bit higher than previously thought. 

It's an interesting point, because generally speaking it's hard to have a dangerous financial 'bubble' without some form of leverage. 

And corporate leverage isn't especially high in Australia today - at least in aggregate - since a number of mining seniors such as Fortescue Metals Group took advantage of high commodity prices to pay down their debt loads. 

There's probably some hidden leverage in Aussie stocks, such as via housing equity redraw, CFDs, options, and other derivatives.

Interestingly margin calls were running at an average of zero per day per 1,000 clients (rounded) through calendar year 2019, as markets rose relentlessly.

Curiously, history shows that as markets rise the appetite for leverage seems to increase as speculators chase gains.

You'd think it would be the other way around, but, then again, people don't behave rationally when it comes to finance!

Thursday 23 January 2020

Mortgage lending strong in Q4

Lending up in Q4

Australia's largest mortgage aggregator Australian Finance Group (AFG) provides a good early ready on mortgage lodgement volumes, and the results for the December quarter were solid, up 19 per cent from the prior corresponding period.

First homebuyer levels hit the highest result since 2013, while non-major banks accounted for 47 per cent of lodgements in the September quarter, marking the highest market share since 2007.

There's some evidence to suggest that borrowers took advantage of stronger capacity after the election, with the average mortgage size up 6 per cent by the end of calendar year 2019 to $539,000 (from $508,000 a year earlier). 

The increase in mortgage size was driven by New South Wales (+6.2 per cent or $38,000 in 2019), and Victoria (+7 per cent or $35,000).

The other state to see a record high mortgage size was South Australia. 

Overall, solid volumes were reported by AFG, a precursor to a more sprightly beginning to activity in 2020.