Australia’s economic situation.

After more than a decade of uninterrupted economic growth Australia is now in recession and with the help of government fiscal irresponsibility, it will be a deep one.

Governments in Australia enjoy giving millions of dollars to the tax payer sans appropriate social security and public health care. It’s vote grabbing initiative that the former conservative government embarked on with a terrible decision to give out a ‘baby bonus’ to couples, now the centre left goverment has guaranteed a severe deficit by throwing billions at the public in the form of first home owner grants. Australia’s revenue almost solely relies on a continuous export market of raw materials to China. Of course with China in recession the commodity markets have slumped, more so base metals and coal exports. Which makes up for 57% of Australia’s exports and Australia’s GDP got crunched in January 2009;  from 1.80% at the end of 2008 to the current 0.3% (Jan 2009). But the centre left goverment in Australia also has decided to bail out the car industry and under written bank debt and guaranteed bank deposits. As local Australian banks raise capital selling their goverment protected debt onto the market, this puts pressure and risk on Australia’s sovereign fund. Which in term will eventually be downgraded as risky assets on the the funds balance sheet grows. This in turn will make it almost impossible for Australia to sell short and long term goverment bonds onto the market. Combining the inability to raise capital and a possible credit downgrade of goverment funds, governments may have no choice but to raise taxes on everything. As the main revenue driver for government accounts was the GST (General Services Tax) tax. Already land tax (commercial property) is now being passed onto tenants of offices buildings, as local goverment try and reverse their deficits. This land tax being passed from landlords onto tenants of office buildings is at a time when office vacancies ate increasing at an alarming rate (due to the recession). Increased taxes on private business will ensure that job losses will mount.

Regarding GDP and Australia’s reliance of raw material exports, it could be a distinct possibility that the Australian mining sector could collapse, from junior miners to medium size miners all will have their profits squeezed as the Australian dollar becomes depressed and demand slumps from Asia. The mining sector and goverment were both winners when the Australia dollar was at an all time high and demand was strong from Asia, this of course has changed dramatically with the Aussie losing 35% since July 2008 and the global economy falling off the cliff mid last year. A strong AUD is unlikely in the short and long term as long as goverments are content at going to ground zero with interest rates and printing money, which in retrospective is a form of currency protectionism. As goverments then fall into major trade surpluses with swelling inventories. Australia may be no different, a cheaper currency could allow exports to pick up in mining but unfortunately profits also will shrink with a collapsing currency. A lower Australian dollar will not be viable for companies to survive especially in a recession environment. Also deflation in global currencies will ensure competition (deflationary) against other commodity producing countries to try and secure their export markets, minus their import markets. As discussed in Global currencies devaluing – protectionism end games, this is an alarming stage in protectionism on trade.

But as the Australia dollar is sold off and money supply increases plus a trade surplus expands, imports will be more expensive, exasperating a pullback in import purchases thus widening the recession. Inflation on imported goods will occur and goods become more expensive due to a collapsing dollar. But like Spain (now falling into a deep recession), Australia has an extremely over leveraged housing market and rental bubble. Due mainly to goverment cash incentives (grants) to buy property a housing bubble has ensured second to Spain’s and worst than the US housing bubble prior to the collapse.

Australia’s stock market and currency are good indicators of investors fears about the Australian economy; both the stock market and currency may slump further as the Australia economy falls deeper into a recession in 2009.

ALL ORDS (one year):

AUD/USD (note recent artificial rally of the AUD, due to the USD weakness, watch for Australian rate cuts and money expansion into 2009):

Japanese bank goes bankrupt – Asia could have a festering banking crisis

The alarming aspect of a Japanese bank (Norinchukin Bank) that has just filed for bankruptcy protection is that it was bank that was not listed on the public markets. It was a private bank with over 4000 investors. Although it will be large enough to cause a ripple effect through the Asia markets in particular causing the HK dollar and iTraxx credit spreads to widen. I did indicate that a Japanese bank could be on the brink, that was briefly discussed in Consumers will punish the financial system for governments exuberant money printing – Be careful on equity market ‘rallies’ into next year.

This bank failure in Japan is not so much of a shock but more a revelation that the Asia banks (outside from Japan) could be now straining to hide any toxic junk they have. But regardless I suspect it will cause a withdrawal of confidence that Asian banks could somewhat come out unscathed from a global banking crisis. In saying that it would be worth watching movement of the Japanese Yen. There was speculation that risk aversion could send a reversal of the Yen highs, meaning the US dollar could gain ground with possible highs over the Yen. This didn’t happen short term, as the US Obama administration with their incumbent Reserve Bank could nationalise the whole US banking system (considering the bigger US banks total 20 different banks – all earmarked for huge Government equity stakes). This would further destabilize the USD as investors will be petrified at the massive moral hazard the US government will embark on; the stock market will sink on any reports of nationalisation as will the USD.

This can be seen in the below graph, speculation that the USD could reach 100 against the Yen were diminished after risk aversion caused the USD to be dumped and the Yen to be bought up again.

On a daily USD/Yen graph: Mometum at 37 days (last two lows) is showing a decline, CCI (1) 20 overlapped with the USD/Yen is showing a sharp decline, the CCI (2) is showing a sharp decline that could mirror lows made on 16 DEc 2008 when the USD touched 88 against the Yen.

(click on graph for larger image)

World Crisis scenarios for the 21st century – Worldwide economic depression – (update 16)

World Crisis scenarios for the 21st century – Worldwide economic depression – (update 16)

2009 could possibly the start of a global economic depression. As governments all over the world scramble to support collapsing asset prices, via stimulus packages and company bailouts, a massive bout of deflation is looming.

In one day (26th Monday 2009) 70,000 jobs were lost from Caterpillar, General Motors, Sprint Nextel, Home Depot and Pfizer

The jobs losses into 2009 will quicken as momentum builds on the economic downturn, what will make the economic situation worst is the government spending programs. Developed countries such as the UK and some European countries may go bankrupt in 2009. UK in particular becoming vulnerable by it’s government spending huge amounts of money to secure banks and the amount of risk it now carries at defaulting on foreign liabilities. This was evident in the dramatic sell off of the GBP (against the Japanese Yen), please refer to graph:

The fear on top of a severe L-shaped recession is now a capital flight of investors pulling funds out of countries, this is a real possibility and an alarming one especially when countries like the UK, America and European countries relay on capital inflows into their markets. The US is another country in a extraordinary risky situation, depending on how deep the recession is in America, and for arguments sake the economy stabilises in 2010; by that stage America could have defaulted on it’s debt and will have little chance of raising capital via oversea investors. Why? If Obama ignites a trade war based on protectionism, this might be cascading effect as economies start to retract from each other. The flow of capital ceases, trade diminished and money is no longer injected into an economy. Instead they (Governments) rev up the money printers for capital, but this also is detrimental as it combines a collapsing economy with inflation. Which ever way it’s look at, a depressed global economic situation appears eminent. Whether a deflation, stagflation orientated depression in 2009, so far it is not looking good.

If the UK goes into a very steep recession and at some point struggles to raise capital and becomes an insolvent country. This will put pressure on the EURO and other countries that have not benefit from a shielded aspect of the EU (which could turn out to be an illusion). Spain, Ireland are at risk of going bankrupt. Iceland would be the bellwether, even though they weren’t in the EU or had the EURO as support. Iceland was still an open economy, as the whole Europe union is, if one country goes down in the EU, then it is without doubt others will follow and the EURO could be sold off dramatically, please refer to graph (EUR and GBP against the YEN) – note the downward pressure on the EUR with the GBP.

Worst still for the EU is some sort of protectionism takes place in Europe, this could essentially be the beginning of the end of the Europe Union.

Currency markets revealing the dire problems in global economies

The economic crisis that is gripping the banking sector and inter market credit markets, has polarized governments to establish an intervention problem beyond anything seen in the history of capitalism and global markets. As discussed numerous times on morbius glass this intervention is short sighted and dangerous for the future of market stability. So this economic crisis could have essentially burnt it’s self out albeit harshly, but that is the down side of capitalism; you play markets in boom times expect at some point a bust. That is the reality of markets. Still the belief that government intervention from fiscal stimulus to bank and company bailouts will work, has now developed into a frenetic hysteria of ‘bailouts’. Of course this will lead to the next crisis, or more correctly has exasperated the next crisis which in all retrospect could be worst than the credit markets imploding.

So with global economies and the markets still collapsing, the unsure aspect and volatility will continue to erode confidence. A widespread panic is developing again this could be the final drop in global markets, particularly stocks. But currencies are an excellent bellwether to it’s perspective economies.

The next crisis (and this could be sudden) could be accumulation of two things both leading into each other as a severe blow to a countries economic stability. The first is currency destruction, which is now happening on a broader economic front, as all countries have gone mad with stimulus packages and bailouts. A risky disposition under the false pretense that somehow countries will avoid a nasty bout of inflation down the line. We know this as untrue as inflation may not have entirely disappeared. Declines on discretionary items may have fallen dramatically, but I still hear and see increase in energy bills, food. Although containable at this point, it is not unfeasible to see a spike in food prices (depending on weather and climate change) and even oil (depending on the geopolitical volatility of the middle east and output shrinking/costs increasing).

When the UK recently decided to bail out RBS, claiming to 70% ownership of the company. The Great Britain Pound was immediately sold off, this was also on news the the UK government would insure credit worthy mortgages and guarantee bank debt. Not just for one bank, but for all banks. Hence the market factoring in that the UK government has now taken on huge risks, including the Bank of England’s terrible balance sheets which now rely on money printing to continue the flow into the UK economy. Not only does a falling pound represent the losing value of it’s worth, but the risk now of a country that may find it hard to raise capital; it’s government debt could be downgraded. As was Spain’s recently, also Portugal, Greece, Italy, Ukraine. Germany, France and the UK are close to be downgraded as credit worthy nations, in other words no one will want the debt.

Refer to graph of the GBP against the Japanese Yen (From 1.41 7th January 2009, down to 1.24 on the 20th January 2009. The sell off was primary on news of the bank bailout out and government intervention into the UK banking system):

With Ireland recently threatening to pull out of the EU if it isn’t bailed out by the EU also effected EURO. The crisis is now in a panic phase, that extends not just from the credit/banking crisis; but politically. As politicians attempt to save their own necks, they are inevitably causing more harm to economic stability than good. It’s a ripple effect, that is becoming more an more pronounced. Disproportional and ‘ad hoc’ intervention is creating far more volatility and market panic, if they were to just allow the markets to correct itself naturally.

In saying that, the EURO was sold off dramatically when Standard and Poor down graded Spain’s sovereign debt, this is a warning shot to the FX markets; that European countries all could be downgraded in someway. With Ireland and Spain who are both extremely over leveraged especially in the property markets.

Refer to graph EURO against the Japanese Yen (from 131  18th December 2008 to 115  20th January 2009)

One of the better currencies (not in value) for measuring risk and volatility in the global markets is the Australian dollar. Once a favorite in carry trading, especially with Japanese FX traders. The AUD collapsed timed with the stock market collapse in September 2008 from .85 down to .60 in October 2008. Now bouncing around in a wide volatile range between .60 and .72, this would indicate the extreme volatility in the global markets. Although now the AUD is on the downside again, it could most probably breakthrough the .60 support. Especially if Australia gets a rating downgrade, or the Reserve Bank cuts rates aggressively in the coming months. Also to note is Australian government intervention in the banking sector of local credit markets. Other factors global too watch that will effect the AUD is the commodity markets, when or if a recovery occurs soon. Which may be unlikely in the short term.

refer to graph AUD/USD:

2009 – Get ready for massive deflation, US dollar destruction and the global economy slump further into recession – Japan in recession is now facing sharp deflation (update 1)

Japan could be the first nation to record record falls in prices hence the term deflation. A country that relies heavily on continue demand from wealthy developed nations is now amidst a nasty deflation spiral. Although I would say the deflation will grip the whole global economy it would be worth noting the countries that are especially prone to a deflation downturn will go first, such as Japan

refer to graph:

Brace for a global recession

Don’t listen to politicians and some bank economist, who have been in denial that the world is heading towards a nasty slump, which could yet end up being a depression. The markets revealed bear markets in stocks early 2008 and commodities started to slow throughout 2008 to present (apart from gold). Shipping has also been slowing rapidly, refer to dry baltic index (morbius glass: The world is most likely in recession). So one should follow the markets closely rather than commentators that have essentially done very little analytical research into the huge unwinding of the credit markets and deleveraging.

Despite the ‘bank bail out’ bill becoming law in the US, the wider economic problems are reverberating around the world. More particularly Europe, which has overinflated housing markets in the UK, Spain and Ireland. So the credit crisis or liquidity squeeze that is causing turmoil amongst European banks, is also on the fear of local housing busts in the main European economies. One could argue that the US was technically in a recession since late 2007, now showing signs of a prolonged and harsh recession. Europe could be hit harder than the US, the markets are now factoring this in, look at the European dollar, a once high yield currency – which was theorised that the European dollar could replace the US dollar as a base currency. This of course won’t happen now, the European economies are all going to fall into recession in unison. The EUR has been sold off quite dramatically of late, weak currencies like the USD and the Japanese Yen are now being bought; since they were both so oversold for so long. The high yield EUR is losing favor. This is a clear signal that Europe is now in recession and the European central Bank (with other central banks) will cut rates aggressively.

The selling off of the EUR is in response to major bank troubles in European and European governments insuring bank deposits for the consumer. Essentially revealing to the US markets that the world is heading for a bad slump; lead by the banks. So in conclusion whatever the bailout bill does to the US, which is very little, the US market accepts that not only is the American economy suffering from so many economic woes, Europe is also.

Reiterating negative market sentiment was the Dow falling 770 points from 10,314 (6 Oct 2008 ) , then recovering to 9,955 points, this is in response to the European Union trying to instill calm, and also the fact that the EU is under strain as countries are independently acting on the banking crisis within Europe.

The next problem will be corporate failures and bankruptcy’s, with credit related derivatives and credit securities backed against company debt. When corporates failures kick in, we could see a huge collapse of hedge funds that invest in corporate bonds (and other complex debt investments). Either way the credit markets are near death. Businesses will find it almost impossible to raise capital. With business capital running completely off credit lines, even if Hedge funds go into survival mode and short sell companies into oblivion; the credit default swap (CDS’s) market will come into play. So the corporate bankruptcies will be an inevitable aspect to the global recession. We may see this occur very soon, as Hedge funds with massive leverage themselves, may fight to survive like a desperate animal. Like I mentioned, since the credit markets are now depressed. Liquidation of assets from companies and CDS payouts may be the only lifeline to Hedge Funds that have bought corporate debt.

In regards to the point I made about civil unrest in Europe, if the Italian PM Silvio Berlusconi is correct that the rest of the EU may bail out the whole European banking system (which is somewhat unlikley, since the US plan will be a flop) – if housing busts inevitably occur on a large scale across the EU and the European Central Bank decides to purchase junk mortgage related assets (from retail banks) – with EU taxes. History has shown that the Germans, French and English know how to riot.

World Crisis scenarios for the 21st century – Worldwide economic depression (update 15)

World Crisis scenarios for the 21st century – Worldwide economic depression (update 15)

As global stock markets are now entering into bear market territory (20% drop in all indexes), it is wise for a investor, consumer or anyone that follows the markets and is concerned about a prolonged economic recession; should now look at a depressed banking sector, the terrible shape it is in and it’s inability to function in a collapsing market (housing in the US, UK, Spain, Ireland, also now Japan, Australia and New Zealand). The current US banking sector is in a shocking disposition, it is by all definition contracting rapidly; that is it’s assets are losing value and their balance sheets, capital pools are shrinking. The Federal Reserve under Ben Bernanke has clearly indicated recently that the Fed would extend it’s lending and bail out policy to not only retail banks but also Wall Street investment banks as well.

Refer to graph of total borrowings of US banks from the Federal Reserve bank – the graph is self explanatory of the amount of money the Fed has lent out to US banks, to essentially bail them out.

Of course this means the Fed will print more money, which they can do ad infinitum, thus depreciating the already weakening US dollar. The arrogance of the Fed under Ben Bernanke is that despite already high inflation, the US consumer in someways will adjust to a money printer policy of bailing out banks; in this case the extremely irresponsible and risk obsessed investment banks. I don’t think the markets care if another bank is bailed out or not, the main concern is now inflation that is eroding consumer confidence and corporate defaults, job losses; but the markets (current bear stock market conditions) is also clearly concerned that and ailing banking industry is afraid to reinvest bank into an recessionary economy. (refer to The Bear Market. Depressed banking stocks dragging indexes lower.) So businesses that were and are still highly leveraged are also going to contract, as they will find it hard to refinance debt, raise capital and function in a slowing and inflated (oil, food) economic environments (stagflation) economy.

This of course contributes to the fear in the credit markets of continue credit defaults, noted in the Itraxx crossover index for 5 yr European investment grade debt, now sitting at 101 EUR. The increasing amount to buy or insure investment debt, is an indication of the high risk of corporate bonds. Simply the Itraxx measures risk in the debt markets of company defaults, the higher the Itraxx, the more risk the market has factored in for bond downgrades and credit defaults.

refer to graph Euro Itraxx (5years):

It appears to be a global synchronized bear market (stocks), the lack of confidence in the global markets could also be indicative of the rising fear of company defaults. The question is could we see a rise in business defaults on a global (synchronized) scale?

If America is to fall into a severe recession (depression), undoubtedly this will drag most of the world into a depressed economy.

The banks in the US, like most banks globally are interconnected; with a lot of leverage and high risk dependency on interbank lending. But as a recent article in Fortune magazine reported, the two banks (although not a new fear) that could go under and then bailed out by the Fed, are Fannie Mae and Freddie Mac. The Federal Reserve may have no choice but to bail out a potential collapse of the mortgage banks (Fannie Mae and Freddie Mac). from Fortune.com:

“Fannie Mae and Freddie Mac are government sponsored enterprises that help the mortgage market function by purchasing pools of loans and packaging them into securities. If one or both couldn’t function, the result would be chaos.

At the end of last year, Fannie alone had packaged and guaranteed about $2.8 trillion worth of mortgages, approximately 23% of all outstanding US mortgage debt. And these securities are highly rated and sold to investors all over the world.

“If Fannie or Freddie failed, it would be far worse than the fall of [investment bank] Bear Stearns,” says Sean Egan, head of credit ratings firm Egan Jones. “It could throw the economy into depression or something close to it.”

the article goes on to say,

“So what would force the Treasury and Fed to step in?

Fannie and Freddie are among the most highly-leveraged companies around, meaning the amount of capital they have on hand is nowhere close to the level of assets they control.

Fannie and Freddie must constantly borrow money in order to operate; if for any reason borrowing costs rose sharply they would not be able to make good on their guarantees or even fund their day to day operations. This is when the government would feel intense pressure to step in and, at the very least, pay contracts in a timely manner.

In an April report, Standard & Poor’s said an Armageddon scenario whereby Fannie and Freddie are insolvent is unlikely, but that the mere possibility of failure at either is a greater threat to the economy than the actual collapse of any investment bank.”

World Crisis scenarios for the 21st century – Worldwide economic depression. (update 11)

World Crisis scenarios for the 21st century – Worldwide economic depression. (update 11)

A global ‘depression’ is a 21st century crisis scenario, part of the ongoing crisis scenarios for the 21st century on morbius glass. At best, in my opinion we are entering a global recession (with a significant slow down in Asia); which in all retrospect will be a harsh recession. Will it lead to a global depression? A possibility – if we are to learn from history; note 1929.

Our ‘leaders’ are doing a terrible job at lying, reassuring calm and generally acting like fools (doing a good job). The G7 in it’s entirety is a waste of time, with a consensus of, ‘yes there are downside’ risks to the global economy (why the talk about the global economy, like it’s option trading desk, is anyones guess?); the nervy, smiley economic boffins at the G7 don’t fill me with confidence. But rather a sort of curiosity at the arrogance of the ‘select’ few that represent a rapidly decaying global financial system. The same people that in someways allowed a global financial error too occur; which is runaway credit expansion, underestimation of high inflation and a shocking assumption on the constant value of assets (especially housing, as we know has gone bust in most European countries, and is completely depressed (housing) in the US) .

With America in a recession, even with Hank Paulson, US Treasury secretary making this comment at the G7, “I believe that we are going to keep growing. If you are growing, you are not in recession, right?”

The final general comment from the G7, “Although “long-term fundamentals remain sound” and recession in the US and elsewhere could be avoided, according to the final communiqué, the world’s richest nations said they stood ready to “take appropriate actions, individually and collectively, in order to secure stability and growth”.

Alright lets forget about these guys.

The Subprime disaster won’t go away anytime soon, the structured investment vehicles namely CDO’S sitting in conduits in every banking system in the world – and that is decay, or ‘toxic waste’ on a large scale.

With global retail banks juggling their own shaky internal markets, the financiers of the global credit boom are now tightening and contracting their accounts. As they have ‘toxic waste’ CDO’s and have disclosed some losses, but have possibly hidden other losses. Or haven’t disclosed at all. This has caused the market too look upon the financial sector as unstable and risky.

Japan is a country that is on the verge of a recession, if not possibly in one. The world second largest economy may hold vast amounts of subprime CDO’s in their banking system and has yet to reveal the scale of losses (estimation in the $400 billion range), from telegraph online article ‘ Japan is the next sub-prime flashpoint ‘,

“Somebody, somewhere, must be sitting on a vast nexus of undisclosed losses. We may find out soon enough whether the hold-outs are in Japan. The banks have to come clean under the country’s strict new audit codes by the end of the tax year in March.

“We think this is where the next big problem is going to pop up,” said Hans Redeker, currency chief at BNP Paribas.

“We know from Bank of Japan’s lending survey that the banks are already tightening hard, so something is brewing. Right now, we are in the lull before the second storm in global markets, and Asia is going to be the source of the nasty surprises,” he said.”

and in regards to the iTraxx (Japan) index,

“The iTraxx Japan index measuring default risk of 50 Japanese companies saw its biggest one-day jump ever on Thursday to 77.5. Rightly or wrongly, it is flashing a serious distress signal.”

With possible huge losses from toxic CDO’s in the Japanese banking system, the yen carry trade seems to be faltering. I have noticed this with FX trading – I have seen a decline in the flight to quality into higher yield currencies, from telegraph online article ‘ Japan is the next sub-prime flashpoint’,

“The yen “carry trade” – borrowing cheap in Tokyo to chase yields from New Zealand, to Brazil, Iceland, and above all Britain – has juiced the global asset boom this decade by $1,000bn. It is perhaps the biggest liquidity pump of them all, yet it stopped pumping in August. Indeed, it is sucking the money back out again. The yen is soaring.”

in regards to the decoupling myth,

“What we know is that Japan’s economy – still the second biggest in the world by far – has fallen over a cliff since October. It remains joined to America’s hip after all. The decoupling theory has failed its first test.

Japan’s machine orders dropped 2.8 per cent in November and a further 3.2 per cent in December. January housing starts fell to the lowest in 40 years, down 18 per cent on the year. Tokyo property was off 22 per cent. Can this still be blamed purely on a change in building rules?

“Recession is a clear and present danger in Japan,” said Tetsufumi Yamakawa, chief Japan economist for Goldman Sachs. “The leading indicators are deteriorating very sharply. Inventory is piling up at a rapid pace. There are clear signs of deceleration in exports of steel and semi-conductors to China,” he said.

Yes, China. It turns out that the intra-Asia trade that was supposed to immunise the region against a slump is a disguised supply-chain ending up in the US market. American shoppers still make 30 per cent of global demand, just as it did a decade ago. Nothing has really changed.”