In the everything bubble it is hard to find exposure to ‘relatively’ cheap things. Just a quick glance at the S&P500 index derivatives market one can see that ‘Put’ options (i.e. buying a put option gives the owner the right to sell at a particular strike price) prices are scraping the bottom of the barrel. While the above 2450 strike price (expires on 19 Jan 2018) seems a stretch for an S&P 500 Index showing 2662 (8.7% higher than the above put option) listening to outgoing Fed Chair Janet Yellen in the December FOMC press conference tells us that group think is alive and kicking. At least she admitted that,
“The stock market has gone up a great deal this year…asset valuations are elevated….We see ratios in the high end of historical ranges…but Economists are not great at knowing what the right valuations are…we don’t have a terrific track record”
Whatever the ultimate timing is of the impending pullback in asset bubbles, the downside will be extra ugly, especially now with so much market behaviour driven by robots with algorithms that have not been thoroughly tested in bear markets. Time to own some longer dated put options me thinks. #MPGA (Make puts great again)
The only thing more dangerous than “Bitcoin Bubble” being the most searched item on this Contrarian Marketplace (CM) blog this month is whether I am tempted to buy it on the basis that in doing so I will call the top. Indeed Bit-coiners should be paying me (in gold please) I never make such a move.
Note in ZeroHedge today one Chinese official, Pan Gongsheng, a deputy governor of the People’s Bank of China predicts “that bitcoin will die of a grand theft, a hack into the blockchain technology behind the cryptocurrency or a collective ban by global governments.” This is consistent to what CM has been saying.
First look at the price when the question is asked and then the percentage of responders thinking it’s a bubble. Reverse logic or Tulip Mania? Sort of reminds me when the Dutch traders in the 1600s were selling silver to the Japanese who valued it more than gold. How much silver can we safely carry they must have thought!
Yes, Australian banks are the most levered to the Home mortgage market. Over 61%. Daylight comes second followed by Norway and Canada. US banks are half the Aussies. Of course any snapshot will tell us that prices are supported by immigration and a robust economy. However when Aussie banks are c.40% exposed to wholesale markets for credit (Japanese banks are around 95% funded by domestic depositors) any turn around in global interest rates means Aussie banks will pay more and eventually be forced to pass it on to tapped out borrowers. The Reserve Bank of Australia kept interest rates flat while tacitly admitting its stuck
A study back in March showed that in Western Australia almost 50% of people with a home loan would be in stress/severe stress if rates jumped 3%. Victoria 42% and bubbly NSW at 38%. I can’t remember bubble Japan property (as dizzy as it got) experienced such stress. A recent ME Bank survey in Australia found only 46 per cent of households were able to save each month. Just 32 per cent could raise $3000 in an emergency and 50 per cent aren’t confident of meeting their obligations if unemployed for three months.
The Weekend AFR reported that according to Digital Finance Analytics, “ there are around 650,000 households in Australia experiencing some form of mortgage stress. If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.”
The problem for Aussie banks is having so many mortgage loans on their books backed against lofty housing prices means that we could face a situation of zombie lending. The risk is that once the banks mark-to-market the real value of one house that is foreclosed upon the rest of the portfolio then starts to look shady and all of a sudden the loss ratios blow out to unsustainable levels. So for all the negative news flow the banks cop for laying off staff while making billions, note net interest margins continue to fall and when confidence falls out of the housing market, the wholesale finance market will require sizable jumps in risk premiums to compensate. Indulge yourself with the chart pack from the RBA on pages 29 & 30 where net margins are 50% lower than they were in 2000, profitability under pressure, non performing loans starting to rise back toward post GFC levels…call me pessimistic but housing prices to income is at 13x now vs only 7x when GFC bit, how is that safety net working for you?
Some may mock, but there is every chance we see a semi or total nationalization of the Aussie banks at some point in the future. Nobody will love the smell of napalm in the morning but then again when the Vic government is handing out interest free loans to the value of 25% of the house price for first home buyers you know you’re at the wrong point in the cycle. Maybe TARP is just short for tarpaulin.
An astute market’s person sent me an interesting chart (above) from the IMF highlighting that US companies have added $7.8t in debt & other liabilities since 2010. The ability to cover interest payments is now at the weakest level since 2008 crisis. When looking at credit ratings for US companies over the last decade, the deterioration has been marked. For all of the turbo charged low interest rate environment set by central banks, the ‘real’ state of corporate financial health on aggregate continues to worsen despite near full employment, record level equity markets and every other word of encouragement from our politicians. However if this is the state of the corporate sector at arguably the sweet spot of the economic cycle I shudder to think the state of potential bankruptcies that will come when the cycle takes a turn for the worse. This is a very bad sign.
So what this table is really showing is that in Western Australia almost 50% of people with a home loan would be in stress/severe stress if rates jumped 3%. Victoria 42% and bubbly NSW at 38%. I can’t remember bubble Japan property (as dizzy as it got) experienced such stress. A recent ME Bank survey in Australia found only 46 per cent of households were able to save each month. Just 32 per cent could raise $3000 in an emergency and 50 per cent aren’t confident of meeting their obligations if unemployed for three months.
Sifting through the Reserve Bank of Australia’s statistics section I stumbled over an interesting selection on credit cards. It is quite detailed. After cutting, dicing and slicing the data I noted that financial institutions are perhaps hiding their hand with respect to confidence in consumers. Aussies have around 16.6mn credit cards in service yet since 2010 average credit card limits have stayed stagnant. Normally if wages are rising and confidence is booming credit card companies can up the limit and feel confident of being repaid. Other data suggests that Aussies aren’t going overboard on nudging the limit but could it be that with 180% household debt to GDP ratios that household budgets are stretched and . Average cash withdrawals and debit card usage don’t explain away the gap but to me this is telling of how tapped out the average Aussie punter is.
The Weekend AFR reported that according to Digital Finance Analytics, “there are around 650,000 households in Australia experiencing some form of mortgage stress. If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.”
What we can be assured of is if we get a housing collapse, Australia’s economy will implode in such a way that these numbers may end up being conservative given the knock on effects of the rapid drop in consumption that would follow causing unemployment to surge. Don’t be surprised if some Aussie banks require a bail out.
Don’t forget Aussie banks get 40-50% of funding from wholesale markets which would turn on a die meaning the upward pressure on interest rates would be even more acute. This is NAB’s term deposit schedule – you can see the lumps in bank funding below. This is going to hurt. The question is when. A double helping of moral hazard anyone?