Gottliebsen's Week: Banks, Markets and short covering, Negative gearing, Superannuation

Last Night

Dow Jones, up ~0.3%
S&P 500, up ~0.3%
Nasdaq, up ~0.2%
Aust dollar, US74.2c


Let’s start the weekend with two personal anecdotes that tell us about strategic investment changes.

The first concerns a young relative who married a year ago. He and his income-earning wife have been in the market to buy a house. Their first encounter with the banks gave them the ability to spend about $400,000 in Melbourne but months later they found their particular bank had become easier to deal with and they discovered they could spend $450,000.

Today’s young couples spend what the bank will allow so that is what they did. They are able to operate their careers from an outer suburb so $450,000 got them a fully renovated 1960s house with four bedrooms and two toilets in a court that is a 20-minute walk to the train station.

The lesson here is that it’s a lot cheaper to live in outer suburbs if you can organise it careerwise, and the banks are widening the purse strings just a little for first home buyers with good jobs.

The second anecdote concerns a different bank.

This particular person had a large amount in a maturing term deposit and was going to redeem the deposit in preparation to transfer the money into a non-bank deposit security because the bank deposit rates were too low.

Then an amazing thing happened.

By chance, the manager was passing the teller and saw his deposit money disappearing out the door.

He interrupted the transaction and increased the one-year deposit rate from the official 2.65 per cent to 3.00 per cent and said they were only matching Westpac, which was doing similar things. 

Banks are getting twitchy that their hard-won bank deposit customers are disappearing and may never come back. So if you have a large sum that you are putting in a bank deposit for one year make sure you get your 3 per cent. Don’t take anything less.

Markets and short covering

Of course, the whole global interest rate game is starting to unravel. We have watched the rush to security which sent 10-year US bonds down to 1.75 per cent. Earlier this week those 10-year bond yields edged up to 1.85 per cent. Last night they traded around 1.89 per cent.

During the last three months of market turmoil nothing terribly dramatic has happened to the real US economy. It has continued on its slow improvement path, although from time to time there have been figures that have disappointed.

What has happened is that the low oil price has triggered fears of large bank bad debts as a result of loans to middle ranking oil companies and emerging countries. The combination of the weak oil price and bank fears caused a massive shorting exercise on Wall Street covering banks and energy companies plus oil. 

And that shorting, particularly in banks, spread to Australia where our big superannuation funds, which are happy to act against the interest of their members, loaned the shorters a large amount of members’ scrip, particularly Commonwealth Bank scrip, so that it could be sold. 

That massive shorting exercise is starting to unravel and as the shorters cover, our markets keep rising.

Donald Trump might be a dangerous US president but he has vowed to attack the abuses on Wall Street. The Wall Street disease has spread to Australia and our stock exchanges and big superannuation funds need a great deal more transparency.

Hillary Clinton is the most likely person to be the next US president and she too is promising to attack Wall Street abuses.

Meanwhile the short covering has extended to oil and other commodities. I think the fundamentals of oil will change in the medium to longer term but the latest rise might have more to do with short covering. If that turns out to be right it will affect bank shares as well as energy producers. Nevertheless, the fact that Russia, the Saudis, Iran and Iraq are all in touch and need a higher oil price means that the seeds of confidence have been planted. That confidence is spreading to other minerals, including copper and iron ore. There is at least a good chance that we are seeing the bottom of the mining slump, although you can’t be absolutely sure because we are still in the middle of the short-covering rally. 

Negative gearing

Our tax debate is now crystallising to an intergenerational dispute. The ALP is on the side of the young home buyers and is quite happy about causing a fall of about 10 per cent in house prices to help the next generation purchase a house.

And they are doing that by reducing the attraction of negative gearing by eliminating it on existing homes but allowing you to negatively gear on new constructions.

At the moment negative gearing plus overseas buying has priced inner city dwelling ownership in Sydney and Melbourne out of the range of most middle or lower income Australians, unless they get help from their parents.

They are bitter and there is no doubt that unless we do something about this we are going to have a very unhappy and unpredictable generation that will be different to anything we have seen in post-war Australia. 

The doomsayers say that the negative gearing changes will also cause a rise in rents, presumably because the lower house prices means that first home buyers will be able to purchase homes and there will be fewer to rent.

The Coalition will get wide support from a large number of people who have bought houses on negative gearing. The party can smell an election victory on the back of negative gearing. And they are probably right. 

Of course, when it comes to apartments, if the politicians really want to reduce the costs they can do that in Sydney and to a lesser degree Melbourne by stopping the cost-increasing rules that state and local governments impose.

We should not forget that at the moment property is what is driving Australia in the wake of the mining slump. That upward momentum comes not only in terms of employment, but higher dwelling values are also causing Australians to have the confidence to increase their spending and lower their savings. It is proving a massive economic stimulation.  

I would therefore be very careful in changing negative gearing at this time because there are clear dangers. You will remember I had the same view about the higher GST, which has similar danger because the higher tax would come in an income recession. 

But longer term, I actually believe we are going to need to change the negative gearing rules because the impact on society of having a generation of renters is not good. Longer term we will pay a big price for this.


If the Coalition abandons any attack on negative gearing then the tax changes that do take place will come via superannuation. It would seem the Liberals will make it harder and more costly to put money into superannuation, while the ALP plans to attack superannuation funds in pension mode.

Once again the proposed tax changes are generational – the ALP is attacking older people in superannuation and the Coalition it attacking younger people by making it tougher and more costly to make superannuation contributions.

The Coalition says it is going to undertake a massive cost reduction exercise but I suspect they do not have the ability to do it.

Finally, big Australian superannuation funds are desperate to stop people having a choice of default funds. Currently in most awards industry superannuation funds are the default funds and it is quite difficult for members to put money into any other fund.

The big superannuation funds say that if this captive market is taken away and members are given a choice then the superannuation funds will be vulnerable to mass exodus. Accordingly they say they will not be able to subscribe to infrastructure projects because they can’t be sure they will keep their money.

The simple fact is that a third of the superannuation movement is in self-funded superannuation funds, which are very well equipped to fund infrastructure projects. All that is required is politicians who are prepared to look beyond the large funds. And if self-managed super funds do gain a greater role in infrastructure funding it will link the community with the infrastructure projects and make it much easier to gain approvals. Bring on the superannuation default changes so that we can gain a more sensible approach to infrastructure funding. 

Readings & Viewings

Nouriel Roubini: Are we back to 2008 and another global financial crisis and recession?

Donald Trump embodies how great republics meet their end.

Could Trump actually win the election?

How a fractured field just might block Trump.

Only the IMF can now save Brazil.

Base load power: a myth used to defend the fossil fuel industry: Renew Economy 

Will Brexit break the pound?

The worst countries to be in if you're in the DVD business.

Smart beds get startup funding nod.

Australia needs to be careful on regulating crowd funding.

There's money in rare books and what some people will do to get them...well, read on. 

The Chris Rock monologue at the opening of the Oscars about Hollywood's 'race issues' was daring, smart and superbly well's not easy walking an issues tightrope live in front of 80 million people but Rock managed it with aplomb ... if you missed it ... take a look.

Last Week

By Shane Oliver, AMP

The past week has seen the recovery in risk assets continue with shares pushing higher, bond yields backing up, credit spreads narrowing, oil and commodities rebounding and even the Australian dollar pushing back over $US0.73. From their recent lows US and global shares are up 9 per cent, Australian shares are up 7 per cent, oil is up 32 per cent, the Australian dollar is up 7 per cent and iron ore is up 34 per cent. Maybe these rallies are telling us that all the handwringing over global growth was overdone.

So what’s helping drive the rebound in shares and other risk assets? It’s a whole bunch of things. 

First, while global growth looks to have slowed a bit it’s not crashing. This is most evident in the US where economic data suggests no sign of the recession that share markets seemed to be moving to factor in earlier this year.

Second, central banks are continuing to help sooth market fears. In the past week, New York Fed President Dudley was dovish on interest rates – indicating concern about inflation expectations, caution on US data and an awareness of the impact of global developments – adding to confidence that the Fed won’t be hiking rates at its March meeting. And the People’s Bank of China relaxed monetary policy again by cutting banks’ required reserve ratios.

Thirdly, policy uncertainty in China appears to have settled down, helped in particular by relative stability in the value of the Renminbi (after its depreciation earlier this year was a major factor in unnerving investors).

Finally, here in Australia, economic growth surprised on the upside helping allay fears about local banks and the housing market.

Of course, it’s still too early to now expect smooth sailing (to the extent financial markets are ever smooth anyway) as fears around the Fed and global growth are likely to continue to periodically test the bulls and give us volatility. But at least things look a lot less bleak than they did in the dim dark days of the northern hemisphere winter.

There was one development over the past week that was a bit concerning – the rise and rise of Donald Trump. Post the Super Tuesday primary votes it’s more and more like it will be a Clinton versus Trump contest in the final vote later this year. Trump is still only getting 30-40 per cent of the Republican primary vote, but the failure of the “not-Trump” Republican vote to clearly settle on one candidate is working in his favour. It needs to soon and the Republican establishment does now seem to be starting to fight back, which may yet help end Trump’s rise.

A Clinton presidency would probably mean more of the same, particularly with a Republican congress likely to help keep policy rational. (Or maybe I have fond memories of the Bill Clinton presidency years).

What is less clear is how a Trump presidency would pan out. What precisely Trump stands for is a bit hard to work out. He is committed to building a wall on the Mexican border (because “They’re bringing drugs. They’re bringing crime. They’re rapists”) and looks to be a glued on protectionism (watch his 1988 interview with Oprah), wants to crack down more on banks and he has crazy foreign policies and plans to deal with terrorists (“take out their families”).

But apart from those things and lots of whacky outbursts, it’s hard to know precisely what his policies as president would be. Hopefully Congress would keep him on a sensible path if he were to gain the presidency. Or that may be just wishful thinking. But before it even gets to that one must hope that common sense will prevail among the median American voter.

Major global economic events and implications

US economic news was good with a gain in the manufacturing conditions ISM for February of 1.3 points to 49.5 with new orders remaining solid, the non-manufacturing ISM remaining solid, construction spending gaining more than expected in January and jobs data mostly looking good.

Eurozone retail sales for January rose by more than expected in January, unemployment continues to trend down (albeit it remains very high at 10.3 per cent) and final business conditions PMIs for February were revised up a bit suggesting that economic conditions may have improved as the month progressed (and share markets recovered).

Japanese economic data was mixed. Industrial production rose more than expected in January and labour market indicators remain strong. Against this real household spending remained weak.

China’s February round of business conditions PMIs were all disappointing suggesting that growth may have slowed a bit further early in the year.

While this may be partly due to distortions associated with the Lunar New Year holiday, further monetary easing in the form of a 0.5 per cent cut to 17 per cent in the banks’ required reserve ratio indicates that the authorities are still focussed on boosting growth. With the reserve ratio remaining high further easing is likely ahead.

Meanwhile, property prices continued to gain with the 100 city Soufun index seeing an average 0.6 per cent gain in February. A risk is that a renewed speculative bubble in Tier 1 cities could be forming, which in turn could detract from equity holdings as the see sawing between shares and property continues.

Australian economic events and implications

Australian economic data was remarkably robust with GDP up a much stronger than expected 3 per cent through 2015, manufacturing and services PMIs rising solidly in February, and January data showing gains in retail sales and new home sales and a narrowing in the trade deficit.

While GDP growth is expected to slow back to around 2.5 per cent this year as mining investment continues to contract, slowing wealth gains weigh on growth in consumer spending and as slowing building approvals lead to a slowing contribution to growth from home building its nevertheless likely to remain well supported.

Low interest rates and the fall in the Australian dollar are clearly helping to support non-mining activity highlighted by surging export earnings from tourism and higher education, the coming on line of LNG export projects will also help sustain export volume growth and growth is likely to remain strong in the population rich states of NSW and Victoria.

While the RBA retained an easing bias at its March Board meeting and arguably strengthened it slightly by saying that “continued low inflation would [as opposed to may] provide scope for easier policy, should that be appropriate..” it’s hard to see them acting on it with growth running above their own forecasts and until unemployment rises more significantly. As such while I remain of the view that the RBA will need to cut interest rates again it has become a very close call.

Meanwhile, capital city home price growth was a moderate 0.5 per cent in February with annual price growth of 7.6 per cent, down from a recent peak of 11.1 per cent last July. Momentum continues to slow in Sydney. For Sydney and Melbourne we continue to see a profile looking something like that seen in the chart below.

Next Week

By Craig James, CommSec

A relatively quiet week is in prospect for domestic and US economic data. In Australia, lending and sentiment figures dominate. Overseas the focus is on economic data out of China.

In Australia, the week kicks off on Monday with job advertisements, tourist arrivals & departures and the Performance of Construction index. To some degree the job advertisement figures have lost some of its linkages as a leading indicator of employment. There have been encouraging signs with a sustainable lift in business hiring intentions. Jobs ads are up over 10 per cent on a year ago and are holding at the highest levels since July 2012.

On Tuesday the National Australia Bank business survey for February is issued together with the ANZ/Roy Morgan weekly consumer sentiment survey. Business confidence lifted in January however conditions fell to an 11-month low, driven by the volatility in global markets. More interest will be paid to the subindices – trading conditions, profitability, exports and forward orders. On the basis of improved global economic data and higher domestic share and home prices, there are good reasons to expect that confidence improved again in January.

Also on Tuesday, Reserve Bank Deputy Governor, Philip Lowe, delivers a speech at the Urban Development Institute of Australia's (UDIA) National Industry Congress, Adelaide.

On Wednesday Westpac and the Melbourne Institute release the March consumer sentiment index data. Main interest is on where consumers believe is the best place to put new savings.

Also on Wednesday the Australian Bureau Statistics will be releasing housing finance data for January. There has certainly been a pullback in terms of investor finance however home buyers are still looking for their dream home with loans to owner-occupiers nearing 7-year highs in December. In addition refinancing is up 20 per cent on a year ago and holding at record highs. According to data from the Australian Bankers Association (ABA) we expect that the value of loans fell by 2 per cent in January, while the value of lending is expected to have fallen by 1 per cent.

On Friday the ABS issues the latest lending figures – the most comprehensive figures on lending in the economy including housing, personal, commercial and lease loans. Businesses are gradually borrowing more.

China dominates global data

There are scant offerings of ‘top shelf’ US economic data releases in the coming week. In contrast there is plenty of key economic data to watch in China.

The week kicks off on Monday in the US with the employment trends report and consumer credit data. Analysts expect consumer credit to have lifted by around $19 billion. Federal Reserve vice-chair Stanley Fischer also delivers a speech – the last major speech by a Fed member ahead of the March 15-16 rates decision.

On Tuesday, the National Federation of Independent Business (NFIB) issues its small business optimism index while the usual weekly data on chain store sales is released.

In China, trade data is issued on Tuesday. While both exports and imports are down on a year ago, most focus is on imports as a measure of domestic spending. The trade surplus is at record highs.

On Wednesday in the US, data on wholesale sales and inventories are issued with little change in both indicators expected. Sales fell 0.3 per cent in December and are tipped to lift only 0.1 per cent in January. The weekly data on housing finance is also issued.

On Thursday in the US the monthly budget data and the usual weekly data on claims for unemployment insurance are issued. In China, the focus is on the February data on consumer and producer prices. Producer prices are still in decline, down 5.3 per cent over the year. And consumer prices are rising at a modest 1.8 per cent annual rate. Further tame inflation readings would leave the door open to more stimulatory measures.

On Saturday the monthly batch of Chinese economic indicators are released – retail sales, production and investment. Chinese economic activity is decidedly mixed. Production and investment growth are slowing while retail sales growth is firm. Expect annual retail sales growth near 10.7 per cent, with production near 6 per cent and investment near 8.5 per cent. The risk is that the results print on the weaker side of expectations over the next couple of months – especially given that a lot of business would have closed for Chinese New Year celebrations earlier in the month.

Sharemarket, interest rates, currencies & commodities

Each quarter the Reserve Bank releases its estimates of the currency in ‘real’ or inflation-adjusted terms. This data assists the Reserve Bank in determining whether the currency is at the ‘right’ levels.

The Reserve Bank produces a trade-weighted index as well as import-weighted and export-weighted indexes with each adjusted for relative consumer price levels.

In the December quarter, the real TWI was up just 0.3 per cent from the 6-year low set in the September quarter. You would expect that the real TWI tracks the terms of trade (ratio of export prices to import prices) over time and indeed that has been the case. The real TWI has lost 20 per cent from the 39-year high set in March 2013.

The performance of the real TWI best describes why the Reserve Bank is comfortable with where the Aussie dollar currently stands.

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