House prices
It’s a different scenario to the GFC, and I see a lot of (spurious) comparisons are being made between now and theGFC, particularly by the media.
In the GFC the problem was in mortgage backed securities and credit default swaps, which are used to manage to manage risk arising from changing credit spreads (the spread between interest rates on bonds of different credit/default risk).
I’m the current scenario it relates to defined benefit pension funds. They promise a pre-defined pension income upon retirement. To achieve this and manage the risks involved (such as how long a retired person will actually live after retiring) they undertake a form of asset-liability matching kind of similar in style to how a bank manages its capital.
As part of this asset-liability management function in order to meet future promised retirement income obligations, they invest in various assets including stocks, bonds, cash, etc, as well as use derivative securities including plain vanilla interest rate swaps.
The unprecedented movement in bond yields/prices caused these defined benefit funds to sell assets on a large scale including bonds for various reasons including mark-to-market margin calls on their interest rate swap positions.
gsco wrote:It’s a different scenario to the GFC, and I see a lot of (spurious) comparisons are being made between now and theGFC, particularly by the media.
In the GFC the problem was in mortgage backed securities and credit default swaps, which are used to manage to manage risk arising from changing credit spreads (the spread between interest rates on bonds of different credit/default risk).
I’m the current scenario it relates to defined benefit pension funds. They promise a pre-defined pension income upon retirement. To achieve this and manage the risks involved (such as how long a retired person will actually live after retiring) they undertake a form of asset-liability matching kind of similar in style to how a bank manages its capital.
As part of this asset-liability management function in order to meet future promised retirement income obligations, they invest in various assets including stocks, bonds, cash, etc, as well as use derivative securities including plain vanilla interest rate swaps.
The unprecedented movement in bond rates/prices caused these defined benefit funds to sell assets on a large scale including bonds for various reasons including mark-to-market margin calls on their interest rate swap positions.
Parts of the situation are different to the GFC but some of the structural issues are the same.
For example, back in the GFC there was huge concern about the suitability of the Euro as a currency for so many countries and differing economies etc. Greece for example couldn't stimulate exports by currency as it didn't have an individual currency. That problem was never resolved, just the kicked the can down the road.
History doesn't repeat, it rhymes.
https://www.reddit.com/r/Wallstreetsilver/comments/xnuj5z/cds_on_credit_...
take with all caveats on source, topic, even doubt the data if you will but yeah
velocityjohnno wrote:https://www.reddit.com/r/Wallstreetsilver/comments/xnuj5z/cds_on_credit_...
take with all caveats on source, topic, even doubt the data if you will but yeah
Interesting and the graph looks legitimate, see this article, which says:
"Credit Suisse’s 5Y CDS spreads are now at its highest levels since the Global Financial Crisis in 2008. The Swiss-based bank has been facing a lot of flak ever since the collapse of its $10bn supply chain finance funds related to Greensill and $4.7bn writedown tied to the Archegos Capital fiasco in 2021. Further, Credit Suisse has also been under the pump due to money laundering issues and its planned workforce downsizing. It has focused on scaling back its investment bank and reducing more than $1bn in costs. The bank has now reported three straight quarterly losses and due to a drop in its capital, the company has sought to rebuild its buffers. However, this has come at a cost – in June 2022, it raised $1.65bn via a PerpNC5 AT1 issuance at a yield of 9.75%. The bonds were priced at a new issue premium of 81.3bp over its comparable 5.25% Perp callable from February to August 2027 that traded at a yield to worst of 8.937% at that time. Most recently, it announced the sale of its Singapore trust business, among others, and a winding down of its legal entities and “residual businesses” in the coming years. The increased credit risk in the lender is now being seen via rating downgrades and the spike in its CDS spreads (as seen in the chart below). Credit Suisse is currently rated Baa2/BBB/BBB by Moody’s/S&P/Fitch vs. Baa1/BBB+/A- prior to 2021. Its dollar bonds have dropped so far this year. For example, its USD 7.25% Perps are down 27% YTD."
Seems that Credit Suisse has had some problems for a while.
Interesting to see some sovereign CDS rates, all from http://www.worldgovernmentbonds.com/cds-historical-data/:
From these, the implied probability of Aus defaulting is 0.42%, the UK is 0.82% and the US is 0.36%.
Loss-making sales grew the fastest in Melbourne and Sydney, according to CoreLogic data, reflecting the sharper downturns in the major cities.
Home values in the two cities have fallen by 2.8% and 1.8%, respectively, during the same period".
ummm.....excuse me for feeling a little underwhelmed over this house price "crash".
2.8 and 1.8% declines for the June Quarter.
3% per qtr is still 12% for a year. But I’m expecting way more than 3% a qtr for the next 12 months.
Data sets are both juiced and obsolete.
Crew still thought it was a real estate endless summer back in April. Now even the munted general population know that winter is coming.
Jees the Aussie is crumbling badly; it kind of had a blow off v the pound and Euro but just cactus the last 2 days; looks like it might go below US60c. Usually a big sign of risk off. Not going to help with inflation but might force the RBA's hand. I think we're returning to the Covid lows or thereabouts. Cash is king.
donweather wrote:3% per qtr is still 12% for a year. But I’m expecting way more than 3% a qtr for the next 12 months.
…And a 12% annual decline during 6% annual inflation…
Any one know about whisky investing schemes. In the current climate 9% guaranteed is looking attractive. But there’s gotta be a catch somewhere me thinks.
https://ownership.coburnsdistillery.com.au/
Edit: found this
https://www.eurekareport.com.au/investment-news/investing-in-a-low-inter...
donweather wrote:Any one know about whisky investing schemes. In the current climate 9% guaranteed is looking attractive. But there’s gotta be a catch somewhere me thinks.
https://ownership.coburnsdistillery.com.au/
Edit: found this
https://www.eurekareport.com.au/investment-news/investing-in-a-low-inter...
"Guaranteed appreciation"
The guarantee and return is only as good as the backing behind it. Seen plenty of guaranteed returns not paid due to the person/entity guaranteeing going bankrupt, then you're just an unsecured creditor.
In addition to some nice cognacs, I have a little stash of primo whisky. I wonder if I can get a few bob for it? Plus a nice little whisky bar down the road I (used to) pop into occasionally.
https://www.abc.net.au/news/2022-10-01/david-taylor-global-financial-cri...
“ So, the options are that the Bank of England keeps coming to the rescue of the UK financial system with the risk of exacerbating inflation which will lead to much higher interest rates, or allow the market to take over, and risk a full-blown financial crisis when the bond market collapses again.”
https://m.
unsettling realities
Silver lining...
Savers and pensioners cheer as bonds surge past 4pc
Savings accounts are beating the stock market for the first time since 2015
abc news
Donweathers macrobusiness site
https://www.macrobusiness.com.au/2022/10/stop-hiking-rba/
Unbelievable. Sanity prevails: https://www.bloomberg.com/news/articles/2022-10-03/uk-s-truss-set-to-aba...
https://www.news.com.au/finance/business/banking/fears-credit-suisse-is-...
it made the msm :p
gsco if you are on a bond desk, wow, what I'd give to just see the sights in such times of standard deviations flying around like in 08... (& yes that UK stuff was 3rd world policy, nicely reversed by a small spot fire in their gilt market lol)
Is over a decade ago now since I worked in capital markets (currently in machine learning), but this bloomberg graph of the daily swing in 30 yr UK yields is interesting (and radical):
and the MOVE index (the "VIX" for bonds) is showing volatility in US treasury yields getting up to what it was in the GFC:
Btw I think the Truss govt has the right idea. As you'd know, it was initially predominately cost-push/supply side inflation that reared its ugly head, which is at best costly and at worst dangerous and futile to fight with reducing demand and inducing a recession via restrictive monetary policy (Australia has been there and done that...!).
The best long-term way to fight cost-push inflation is by "shifting the aggregate supply curve to the right" - supply side economics. Tax cuts that create incentives are a (small) part of the box of supply side tools, but are not wise in an inflationary environment and when they're at odds with the activities of the BoE.
And tax cuts targeted at the better off in society are very on the nose in our current left progressive woke zeitgeist...
Australia learnt this lesson about supply side economics. A long-term agenda of controlling inflation and improving productivity and competitiveness via supply side reforms is what we embarked on for a number of decades, and it worked - things like microeconomic reform, labour market deregulation, competition policy, globalisation, infrastructure investment, etc...
I think the idea of supply side reforms aimed at increasing the productive capacity of the UK economy and combating cost-push inflation is really what the Truss government is rightly trying to get at. It just hasn't been well sold.
Imagine trying to shore up confidence making the reassuring phone calls:
Credit Suisse
"The teams are actively engaging with our top clients and counterparties this weekend,” an executive told the newspaper. "
The calls might sound a bit like this:
.... yes Monsieur de la Fontaine your $10mill account is very safe, I can assure you... Moving your funds is unnecessary.
.... no Herr Hamburger, we are not like Lehman Brothers, your family's large gold holdings in our vault have not been pledged as security in any of our derivatives without your knowledge. No, now is not convenient to collect your gold bars. They are being off being polished by our official polisher to make them extra shiny. You can view them next month.
Some sweaty palms on both sides.
“And tax cuts targeted at the better off in society are very on the nose in our current left progressive woke zeitgeist...”
You say that like it’s a bad thing
nowadays you only hate on me bonza ;)
Monday ~ 4 Corners ( No Place to call Home )
https://www.abc.net.au/4corners/
gsco wrote:nowadays you only hate on me bonza ;)
Ha! I’m just here to help. Haha
pretty interesting times when people like alan kohler are coming out and explicitly suggesting the reserve bank...
'put rate rises on hold for a while'
thanks for that reply gsco, that was very good. You must've got to see the PIIGS CDS spike until Draghi did 'whatever it takes'. A question, where would the supply side go to make things more competitive, especially in 10%+ inflation? It would seem we've deregulated hours, labour markets, international borders away to such an extent the workforce is already very flexible (and wage growth suppressed). How much more can be gained? I can see renewable powered automated domestic manufacturing/value adding, but that one is capital intensive and a fair way away.
Also, I guess I'm still cheering on rate rises as I see a great, long term imbalance in property prices to average income (and see artificially low interest rates for too long as causative, blowing bubbles everywhere) This ratio is a critical determinant in how early young people can do family formation (and create the next generation of productive workers). The CBs will stop as things start to break, it seems. Reversion to the mean here would be helpful, and the imbalance precedes the most recent supply side inflation spike by a long shot.
And: why did productivity per capita peak in 2012 and has been going down since ?(hello, social media, lol) Productivity per capita is such an interesting metric.
emergency fed meeting this AM
https://www.reddit.com/r/wallstreetbets/comments/xt4q39/emergency_meetin...
Just sussing out property prices around the nation I would say they are still very high. Maybe some small drops but in the broader context of what happened in the last 2-3 years, it is nothing crazy.
flollo wrote:Just sussing out property prices around the nation I would say they are still very high. Maybe some small drops but in the broader context of what happened in the last 2-3 years, it is nothing crazy.
Just remember there’s a reasonable lag between RBA interest rate hikes and the downward trend of house prices. The first indicator is how much longer properties are on the market for. This has already blown out in the last few months. Significant price falls will follow suit.
velocityjohnno wrote:emergency fed meeting this AM
https://www.reddit.com/r/wallstreetbets/comments/xt4q39/emergency_meetin...
This has already occurred. Do we know the outcome? Based on the US stock market overnight and ASX today if there’s any news out of this board meeting then it must be good?
Edit: haven’t read it yet.
https://www.newyorkfed.org/newsevents/speeches/2022/wil221003
velocityjohnno wrote:thanks for that reply gsco, that was very good. You must've got to see the PIIGS CDS spike until Draghi did 'whatever it takes'.
A question, where would the supply side go to make things more competitive, especially in 10%+ inflation? It would seem we've deregulated hours, labour markets, international borders away to such an extent the workforce is already very flexible (and wage growth suppressed). How much more can be gained? I can see renewable powered automated domestic manufacturing/value adding, but that one is capital intensive and a fair way away.
Also, I guess I'm still cheering on rate rises as I see a great, long term imbalance in property prices to average income (and see artificially low interest rates for too long as causative, blowing bubbles everywhere) This ratio is a critical determinant in how early young people can do family formation (and create the next generation of productive workers). The CBs will stop as things start to break, it seems. Reversion to the mean here would be helpful, and the imbalance precedes the most recent supply side inflation spike by a long shot.
And: why did productivity per capita peak in 2012 and has been going down since ?(hello, social media, lol) Productivity per capita is such an interesting metric.
Yes I was working for a big-4 bank in Sydney during the GFC and a little while after it (then left the industry disgruntled...!) and it was an unenjoyable time to be in the markets.
Re your 2nd last paragraph, yes even though share and property prices have fallen, all indicators still seem to point to us (particularly the USA) being in the biggest asset price bubble of all time (maybe not so much Aus shares). To realign with historically sane valuation multiples, the US share indices still seem to have to fall 30-40%.
Regarding supply side economics, productivity and real wages, well it's the ultimate question on every advanced economy's lips right now.
To increase the long run supply side economic potential of the economy while maintaining low inflation, both the following need to increase: (i) the size/supply of factors of production such as natural resources, labour force, capital investment, infrastructure, etc, and (ii) the efficiency via which those factors are employed - i.e. productivity.
Productivity growth is the only thing that matters for real wage growth over the medium to long term - everything else is irrelevant. Competitiveness is one aspect of productivity. After riding the wave of microeconomic reform, competition policy, globalisation, etc, modern economies now need the next productivity growth stimulus.
But (and re your last paragraph) Aus has been doing pretty with productivity and real wages:
Average wages vs CPI:
Productivity (and average wages):
The only real issue is the current inflation event eating into real wages. But increasing wages to keep up with inflation would be the most disastrous thing that could be done.
What can be done - what are the drivers of productivity? I think this recent book by the World Bank is a pretty good place to start: Global Productivity: Trends, Drivers, and Policies. One important thing I think Aus has neglected and now needs to return to is education - both tertiary and vocational.
Btw I also don't object to some restrictive monetary policy to counter inflation since the drivers of inflation have broadened into demand and consumption.
But the problem we've had over the post-GFC period is that the only policy solution to getting economies going again was super easy monetary policy - low to zero interest rates and quantitative easing - that was not combined with appropriate, pragmatic and aligned budgets and fiscal policy focused on the drivers of productivity and competitiveness, due to incompetent governments (blinded by the political and economic ideology wars) being in charge of fiscal policy.
Note that this is a strong argument against the idiocy that is so called "modern monetary theory". Governments can not be trusted as economic managers due to incompetence and being blinded by ideology. Independent, pragmatic central banks need to do a lot of the work via pragmatic monetary policy, as they do. But importantly, I think modern economies also need independent, pragmatic fiscal policy and budget setting institutions set up, analogous to independent central banks, which take this crucial role of pragmatic, realist, non-ideological fiscal policy out of the hands of incompetent governments, and in particular make sure that it is aligned with central bank activities.
@gsco that's a brilliant post mate. Although, it will be a tough one to swallow for many people due to the reasons you highlighted.
What most surprises me out of all this is the sheer amount of central bank bashing and blaming that's occurring.
Central banks have been left with the task of trying to fix things since the GFC, often while governments work directly against them.
It's just a pure fact - no an ideological statement - that if you increase the money supply via zero interest rates and quantitative easing over and above increases in the productive capacity of the economy (the supply side) then:
- all that money sloshing around will have have nowhere to go except into asset price bubbles and inflation,
- everyone will be complaining about sluggish real wages and productivity growth, and
- when central banks then need to taper off the money supply growth to control inflation then we get financial market stability issues due to markets adapting to >10yrs of quantitative easing (in the industry they're aptly currently calling it a "taper tantrum").
And then central banks get the blame for the mess...
The real cause of the problem is a lack of coordination between monetary and fiscal policy, and government fiscal policy incompetence and neglect, all being driven by governments being engaged in the political ideology wars instead of economic pragmatism and realism.
Here's a good but quite long and technical read by John Hussman explaining a lot of this, even though he likes his central bank bashing as much as anyone..
0.25% rise. Looks like they haven't over-reacted and the markets have responded in positive fashion.
Craig wrote:0.25% rise. Looks like they haven't over-reacted and the markets have responded in positive fashion.
Yeah markets certainly on a tear the last few days since Truss did a backflip. ASX also liking the lower end of the predicted rate rise.
@ gsco "What can be done - what are the drivers of productivity? I think this recent book by the World Bank is a pretty good place to start: Global Productivity: Trends, Drivers, and Policies. One important thing I think Aus has neglected and now needs to return to is education - both tertiary and vocational."
Good point given the rate of functional illiteracy in school kids and the lack of both awareness and teaching skills necessary to begin to address this issue. Flollo posted something along these lines previously. Dropout rates in Tafe one indicator of this. Kids put in so called "diverse learning " classes when the real issue is they cant read, hence cant address the curriculum,
So we’re at 2.6%
NZ is 3% and consensus is tomorrow they’ll be 3.5% and possibly 4 by year end
US is 3.25% and have shown their hand that it will probably hit mid 4’s by year end.
Good stuff once more and thanks for the replies gsco. Find I'm in agreeance regarding there still being a bubble, the ultra easy monetary policy sloshing around and finding assets to punt, the horror of MMT, the need for some restriction in monetary policy.
The focus on productivity is very interesting. Are wage rates the same as productivity? Or are they different from the actual output of useful, value-added goods and services? Immediately, I think wages can be goosed by inflation (ie rising from it) or be suppressed by supply (extra workers arrive for the same jobs). It seems to me Australia has done the full 'Dutch Disease' since the mining boom, and we've hollowed out a great deal of our real, productive enterprises. What has replaced them (and pays the wages) is differently 'productively capable' pursuits, if I can put it that way. Are we more efficient now? Does it matter when our terms of trade is dominated by a couple of primary exports? (Edit: Recent QLD announcement on massive renewable infrastructure buildout looks to be very positive)
I can tell you from the vocational side down on the surf coast, there's all sorts of bonuses, perks, schemes for the tradies - to encourage young ones to begin and see it through. The education quality seems good, teachers excellent, and employer support also excellent.
0.25%, there's the slowing, too early to say RBA pivot after BOE pivot?
I'm seeing double.
Don, the US Fed meeting was tabled as concerning interbank lending. Much speaking and hoo-ha afterward.
Velocity, don and gsco is there a guide to some of the terms you guys use that work in finance sectors for the general people interested outside the loop. I heard the "bear market"the other day as well as the pigeons and the hawks terms being thrown around on the business and wondered how I can get more informed on industry terms that are commonly used by economists. Thanks for you interesting insights. Been great following the analysis you all provide as it all develops or unfolds..
Hi Rob, try this
https://www.investopedia.com/financial-term-dictionary-4769738
or just put up a question. For eg, Flollo and gsco are trained in economics and maths, and so will pick up the macro stuff (big picture) and understand it at a level I don't. I'm a historian with a monetary interest, so will be able to tell you the colourful stories from the history of markets, like Jay Gould trying to corner the gold market in 1869; or why the roaring 20's in the US can be explained as a result of both the adoption of postwar technologies, but also a large amount of credit creation; or how the gold:silver ratio naturally floated over most of the last of the last 500 years (15:1 on average iirc) to form a stable, solid monetary system.
thank you
https://investinganswers.com/dictionary/h/hawk
raaak! raaaak!
For Australian financial terminology::
- https://moneysmart.gov.au/glossary
- https://business.gov.au/finance/accounting/key-financial-terms
Some economics glossaries:
- https://www.economist.com/economics-a-to-z
- https://en.m.wikipedia.org/wiki/Glossary_of_economics
- https://www.stlouisfed.org/education/glossary
- https://www.core-econ.org/the-economy/book/text/50-02-glossary.html
- https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/methodo...
yeah, great reading Flollo, GSCO and VJ.
haha this is like a postgrad in macro
thank you
House prices - going to go up , down or sideways ?
Opinions and anecdotal stories if you could.
Cheers