Debt

Repossession by remote

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A growing number of car loans in the US are being pushed further down the repayment line as much as 84 months. In the new car market the percentage of 73-84-month loans is 33.8%, triple the level of 2009. Even 10% of 2010 model year bangers are being bought on 84 month term loans. The US ended 2016 with c.$1.2 trillion in outstanding auto loan debt, up 9%YoY and 13% above the pre-crisis peak in 2005.

Why is this happening? Mortgage regulations tightened after 2008 to prevent financial lenders from writing predatory loans, especially sub prime. Auto lending attracts far less scrutiny. Hence the following table looks like it does with respect to outstanding accounts on loans

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Sub Prime auto loans, at all time records, make up 25% of the total. Devices installed in cars let collection agencies repossess vehicles by remote when the borrower falls behind on repayment. This lowers risk and allows these long dated loan products to thrive. Average subprime auto loans carry 10% p.a. interest rates. More than 6 million American consumers are at least 90 days late on their car loan repayments, according to the Federal Reserve Bank of New York.

While it is true that $1.2 trillion auto loan book pales into insignificance versus the $10 trillion in mortgage debt at the time of the GFC, a slowdown in auto sales (happening now) isn’t helpful. The auto industry directly and indirectly employs c. 10% of the workforce and slowing new and used car sales will just put more pressure on prices further lifting the risk of repossessions

It is worth reminding ourselves the following.

Last month the Fed published its 2016 update on household financial wellbeing. To sum up:

“44%. This is actually an improvement on the 2015 survey that said 47% of Americans can’t raise $400 in an emergency without selling something. The consistency is the frightening part. The survey in 2013 showed 50% were under the $400 pressure line. Of the group that could not raise the cash, 45% said they would go further in debt and use a credit card to pay It off over time. while 25% would borrow from friends or family, 27% would forgo the emergency while the balance would turn to selling items or using a payday loan to get by. The report also noted just under a quarter of adults are not able to pay all of their current month’s bills in full while 25% reported skipping medical treatments due to the high cost in the prior year. Additionally, 28% of adults who haven’t retired yet reported to being largely unprepared, indicating no retirement savings or pension whatsoever. Welcome to a gigantic problem ahead. Not to mention the massive unfunded liabilities in the public pension system which in certain cases has seen staff retire early so they can get a lump sum before it folds.”

If only this perpetual debt cycle could be stopped via remote. Someone else’s problem one would suggest.

Dick Turpin Turnbull will chase away foreign capital

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I was asked by a client this week on what I thought of Australia’s political climate. I said to him, “if you asked me 15-20 years ago I’d safely argue that it was the only country in the region which could boast incredibly stable government, sensible economic policy and a safe place to park your money. Today I can’t say with hand on heart that this is the Australia you are investing in today. What I will say is that you should keep your powder dry because it will become a ‘pound shop’ in the not too distant future with a weaker currency, higher rates and fire sale asset prices.”

He asked if I could elaborate. I replied “we have had 5 prime  ministers in almost as many years. Before that we never saw anything like that. Our political climate is vile and volatile. We now have a government that is seeking to put in place knowingly unsound policies to arrest poll declines rather than try to fix an out of control deficit. What they are failing to see is that bashing big banks (especially for a conservative Coalition government) out of the blue chases off investment (Alan Joyce and Don Argua are right about that). Foreign investors must wonder whether they may fall foul of knee-jerk regulations and decide the risk is not worth it. So in answer to your question the current climate is going to offer some fantastic opportunities down the line because all of the political turmoil will eventually force change and buying into the market leading into that will be your best bet.”

So with our Dick Turpin highwayman robber at the helm we invite unwelcome flight of capital. If you want to create jobs, growth, stability and invite foreign investment you do so by providing a platform that supports it. It isn’t won by bashing industry, cranking up public spending and hiking taxes. It is done by making yourself the safest place to invest and all the while that happens the risk falls meaning capital is not only cheaper but more abundant. This isn’t trickle down economics but sound policy. Sadly talking of net debt isn’t going to save this government and what is worse Opposition leader Bill Shorten wants to outspend a budget that makes the Sultan of Brunei’s giveaways look like Venezuelan austerity measures.

Are the Aussie major banks as greedy as made out?

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One would imagine that Turnbull and Morrison would consult the Treasury or the Reserve Bank of Australia (RBA) to get a feel for the true state of bank greediness. Of course as a political point scorer it is an easy one because Aussie mortgage debt stress is so high and any relief that absolves their own accountability is a plus. Turnbull doesn’t worry about reality and given his supposed business acumen saw no need to consult the banks. Just Mug them in a back alley. Then wonder why they say in response to the proposed tax slug why employees, customers and shareholders will suffer in some way or another. Any conservative government knows that nearly all financial institutions operate for shareholders over customers. In a round about way customers can always choose to switch institutions if they find a better deal. Market forces keep some level of competition but the above chart shows that the return to shareholders for the evil major banks is at 24 yr lows. Profitability is well off the highs. So shareholders aren’t getting the spoils they are accused of. Of course low interest rate environments place extra pressure on net interest margins and they too are hovering at post GFC lows. Never mind. When trying to arrest disastrous polling Turnbull will happily put himself ahead of country. Even if it means dynamiting the tracks of the one sector that greases the wheels of the economy.

The McTurnbull Burger – 2017 budget that says ‘waistline be damned!’

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Remember the Big Mac jingo? “Two all beef patties, special sauce, lettuce, cheese, pickles,  onions on a sesame seed bun?”  Well the 2017 budget From the Coalition might as well be called the super sized McTurnbull Burger. Two all thief parties, special porkies, levies, fees, spun on a $600bn dollar bomb. While the government needed to introduce a vegan budget of lentils, tofu and alfalfa to get the country’s nutrition properly sorted they’ve said waistline be damned. Morgan Spurlock couldn’t keep up with this super sized meal. As my wise sage Stu told me last week, “About as well-timed as Mining Super Profits tax – ding ding ding – top of the banking cycle just called by inept bureaucrats”

If people wanted a tax and spend party they’d have voted Labor. In a desperate attempt to supersize the meal they’ve made of the economy since Turnbull took office the debt ceiling will be raised. Wage growth has slowed for the past 5 years from 4% to under 2% according to the RBA. Throw higher Medicare on top why not?!. Cost of living is soaring. So let’s look at the extra calories they’ll inevitably load on the taxpayer.

1) Let’s tax the big 4 banks. That’ll work. What will they do as responsible shareholder owned organizations? Pass those costs straight on to the tapped out borrower where 1/3 mortgagees already under strain and 25% odd have less than a month of buffer savings. NAB already jacked interest only loans 50bps.

2) allowing retirees to park $300,000 tax free into super if they downsize their empty nest. Wow! So sell your $5mn waterfront property so you can park $300k tax free into superannuation. Can see those Mosmanites queue up to move to Punchbowl to retire. Hopefully the $1mn fibro former council shack the Punchbowl pensioner flips will mean they can move to a $500,000 demountable in Casula in order to free up the property market for the first home buyer who is getting stung with higher interest rates, .

3) Australia has a property bubble. The Reserve Bank has recently had an epiphany where they’re afraid to raise rates to crash the housing market and they can’t cut because they’ll fire it up more. Allowing creative superannuation deposit schemes (max $30,000 per person & $15k/year) to help with a deposit only doubles down on encouraging first home buyers to get levered up at the top of the market using a system designed to build a safety net for retirement. When governments start abusing sensible policies in ways it was never designed for then look out for trouble down the line. This doesn’t help first home buyers it just pushes up the hurdle to enter.

4) Australia’s credit rating is on the block. Australia’s main banks are 40% wholesale financed meaning they have to go out into the market unlike Japanese banks which are almost 100% funded by their depositors. Aussie banks could see a rise in their cost of funds which the RBA could do little to avoid. That will put a huge dent in the retail consumption figures.

5) speaking of credit cards. Have people noticed that average credit card limits have not budged in 7 years. If banks are confident in the ability of consumers to repay debt, they’d let out the limits to encourage them to splash out! Not so – see here for more details.

6) Infrastructure – I live in the land of big infrastructure. Jobs creation schemes which mostly never recover the costs – especially regional rail. The Sydney-Melbourne bullet train makes absolute sense. We only need look at the submarines to know that waste will be a reality.

7) small business – tax concessions of $20,000 not much to write home about. Small businesses thrive on a robust economy which is unlikely to occur given the backdrop. Once again this budget is based on rosy assumptions and you can bet your bottom dollar Australia won’t be back in surplus by 2021.

Some  media are talking of Turnbull & Morrison stealing the thunder of the Labor Party, providing a budget more akin to their platform. Sadly I disagree that this legitimizes Turnbull. It totally alienates his base, what is left of it. Tax the rich, give to the poor. Moreover voters see through the veneer. The stench of the Coalition is so on the nose that without ditching Turnbull they have no chance of keeping office. Labor is not much better and One Nation and other independents will hoover up disaffected voters by effectively letting the others dance around the petty identity political correctness nonsense.

In the end the McTurnbull Burger meal will look like the usual finished product which resembles nothing like the picture you see on the menu. A flattened combination of squished mush, soggy over-salted fries and a large Coke where the cup is 90% ice. Yep, the Coalition has spat between your buns too. This is a meal that won’t get voters queuing up for more. Well at least we know Turnbull remembers that smiles and selfies are free after all ‘he’s lovin’ it‘! After all virtue signaling is all that matters. All this to arrest some shoddy poll numbers which will unlikely last more than one week.

Breaking (News) the bank

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What a joke. The Turnbull Coalition would seem to be looking to increase the debt ceiling another $100bn. Instead of focusing on sensible fiscal repair (unpleasant truths) he’ll focus on handouts (comforting lies) to make people feel better about themselves. Tonight’s budget will be full of hand outs we can ill afford. Borrow and spend has been a hallmark of Labor governments, not coalition governments. Yet Turnbull is so far down the polls that his vanity will cause the spigots to be turned on full. There is a video doing the rounds of PM Turnbull and Treasurer Morrison rehearsing the budget speech – it is so fake, contrived as to make a manager’s speech about how good things are to staff a week before commencing mass layoffs. The audience doesn’t believe a word of the bullshit bingo. Taking them for fools is perhaps the best way to alienate them further. Watch Turnbull’s numbers tank.

Trump’s tax cuts – how much does corporate America pay? You’ll be surprised by the necessary evil

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How can Trump cut taxes to 15%? For those greedy corporates! Interestingly when one deep dives into the data two things emerge. One is that in 2016 net corporate tax receipts fell to around $444bn. Second US corporate taxes have slumped from 6% of GDP in the 1960s to around 2.4% of GDP today. Income tax and payroll taxes make up around 65% of the tax that fills the Treasury Department’s coffers. Of the $2.2 trillion that the government gets through squeezing us, they splurge around $3.6 trillion (see below).  Since the tech bubble collapse, the budget deficit has becoming a gaping chasm. It is a massive hole to fill.

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Naturally people scream that giving corporates massive tax breaks is obscene. What they tend to forget is that US corporations hide an obscene amount of taxable revenue (some estimate around $500bn p.a.) overseas. Apple’s €13bn tax bill fight in the EU should spring to mind. In any event we should look at corporate tax in the US that brings in around $444bn p.a. Slashing tax rates does not automatically imply that the $444bn will fall to $200bn. Looking at corporate profitability before tax one wonders are businesses really struggling? Pre-tax profits are hovering at around $2.2 trillion.

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There is a whiff of Poland about Trump’s plan. Poland faced similar corporate tax avoidance issues but in 2004 introduced sensible taxation reform which cured the problem. To lure tax avoiders/evaders from their lairs, Polish athorities introduced a flat business tax (19%) and its impacts were so favourable that the government saw a 50% increase in income reported by those corporates in higher tax brackets before the change and a 50% increase in reported income from individuals that fell into upper income tax brackets. In 2009 income tax rates at the top were slashed from 40% to 32% Despite this income tax receipts jumped 17%. Since 2004 tax receipts soared 56.4%. It clearly proved that lowering taxes created much higher tax compliance. There was a psychological factor at play – the cut ‘encouraged’ honesty.

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When breaking down the tax take by the Polish government we see that all levels of tax collection rose. Consumption, corporate, personal income and other tax categories jumped  45% or more.

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So there is method to the madness. Talks of a $2 trillion deficit that will need to be funded if it goes ahead is not based on reasoned economics if the Polish example is anything to go by. Besides we live in such a debt-fueled world now that central banks will just print the gap if others won’t step in and buy it. So this is a risk Trump sees worth taking. Lower taxes, encourage US corporates to repatriate income abroad, create jobs and get small business (50% of employment in America) to expand and create a virtuous circle. Whether he can pass these taxes through remains to be seen. What we can say is that corporate taxes are a measly % of GDP and total tax take compared to income and payroll taxes. However if US corporates aren’t encouraged to build at home then it is harder to squeeze the workforce for the bulk of the revenue pie. Pretty simple really and there is actually very little to lose. So quit the angry ‘evil corporates’ tag line and change it to ‘necessary evil.’

Is it any wonder the natives are restless? Part time employment is growing too fast

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The alarm bells keep jangling. I remember reporting on why I thought Trump would win the presidency more than12 months before the fact. The employment situation defied the stats which the Democrats continually congratulated themselves over. Yet beneath that poverty was at all time highs, people on food stamps had grown 12mn since 2008 (to 46mn) and the number of people working more than one job was a record 8mn. The gap between the haves and have nots just kept getting bigger.

Stratfor wrote in the similar outcome in Europe today,

About six in ten jobs in the European Union today are full-time permanent positions. But jobs offered under part-time and temporary contracts account for an increasing share of total employment. In 2003, well before Europe’s economic crisis, 15 percent of workers in the European Union were employed under part-time contracts. By 2015, that had risen to 19 percent. During the same period, temporary contracts rose from 9 percent of total employment to 11 percent. Temporary jobs offer less security than even part-time permanent ones. They often come with lower salaries and fewer training and career advancement opportunities, making it harder for workers to access credit, plan their consumption decisions or qualify for unemployment benefits.”

One other glaring stat that sent shockwaves was the sharp increase in public sector employment. Even Germany saw public service jobs expand from 9% in 2001 to over 16% in 2013. Every EU country with the exception of France (ironically) exhibits the same state built employment market which masks the disastrous economic stewardship since GFC. Please refer to page 13 of this report for graphic.

Stratfor goes on to say,

“Job security is also tied to workers’ overall satisfaction. Since the start of the 2008 crisis, many Europeans have been forced to accept temporary contracts or permanent part-time jobs when they would rather work on a full-time, permanent basis. In many cases, the part-time or temporary contracts do not offer a path to full-time work. In some countries, low salaries also put the working poor at risk of falling into poverty. Jobs that do not offer much security can be found almost everywhere in the European Union, but they are particularly prevalent in the south, such as Greece, Spain and Portugal, where the unemployment crisis was more severe and the economic recovery more fragile. In addition, the structure of the economy in Southern Europe is more conducive to the creation of such precarious jobs.”

Whether one likes it or not the appeal of Le Pen in France is not a mere lurch to xenophobia. If you rationally listen to her platform outside her stance against Islam she makes salient points on policy that will make citizens feel safer about their economic future. The UK Labour Party totally misread Brexit and now face total wipeout on June 8. Like we know from many recent polls they are prone to enormous swings. The Twitter correlations of Trump, Brexit, Trudeau picked the winner. Le Pen is way in front although growth in followers since yesterday puts Melenchon top with Fillon second. Le Pen’s growth came in 3rd. However Facebook following puts Le Pen over 400,000 clear of her nearest rival, Melenchon.

The weird trend in global politics is that traditional party lines are fraying. The Aussie Liberal Party which I’ve supported religiously since I could vote no longer represents me. People are growing tired of empty promises or politicians that swing toward a stance to capture a wave when it contradicts previous policy. Le Pen, like Pauline Hanson speaks a consistent language. Whether one thinks certain policies are bigoted, racist or un-PC is irrelevant to a growing number. They want results not platitudes. These voters are prepared to sacrifice some unpalatable views in return for someone they feel they can trust in matters most important to them – put simply financial security.

If the world economy was ticking along so nicely we wouldn’t see the likes of Le Pen, Hanson or Trump. The reality is simple, when they draw the curtains each morning they see approaching storm clouds get closer and closer not the blue sky they crave.