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Aussie Reserve Bank, Considering “Extreme Measures”, Admits “We’re Almost Out Of Ammo”

Aussie Reserve Bank, Considering “Extreme Measures”, Admits “We’re Almost Out Of Ammo”

At least one reserve bank globally is starting to ponder the question that many central banks across the world will soon inevitably be asking: what happens if we cut to zero and the economy continues to falter?

This has led Australia to start considering QE, following in the footsteps of a world full of central bankers all offering each other as much confirmation bias necessary to continue to walk down the path of eventual economic destruction.

In Australia, the reserve bank has cut to 1% and “nobody expects them to stop cutting,” according to News.com.au. The bank released this chart days ago, showing that market is expecting further cuts. 

The average of all expectations is for the market to fall to 0.37% by September 2020. That exact outcome is described as “unlikely”, but the RBA could have rates at 0.25% or 0.5% by then. That would only leave room for one or two more cuts before rates are at zero.

Then what? Destroy your currency and print your way out of your problems. 

Apparently convinced that economies only exist as permanent booms now, the RBA said last week that it would begin a program similar to QE in the United States, wherein the central bank would buy financial assets in exchange for cash. The RBA is considering buying Australian government bonds.

“We could take action to lower the risk-free rates further out along the term spectrum,” said the RBA Governor.

Justifying this nonsense, the article then gives the quintessential example of how QE bond buying works in practice:

Bonds are how the government borrows. Here’s how it works in simplified terms:

The government offers to sell a piece of paper that says, “Australia will pay you back a million dollars in 10 years” (a 10-year bond).

Someone buys that for, let’s say, $900,000.

 …click on the above link to read the rest of the article…

Australia Lowers Rate to Historic Low of 1%

Australia Lowers Rate to Historic Low of 1% 

The Reserve Bank of Australia has cut the official cash rate for the second month in a row to 1%. As we head into the turning point of the Economic Confidence Model come January 2020, the unemployment rate increased to 5.2% in April. GDP growth remains very low at 0.4%, wage growth is sluggish, inflation is well below target, and retail sales are struggling. None of this will change until after the ECM turns as people begin to see that central banks are incapable of managing the economy.

Australia’s Economy Is A House Of Cards, Set For Sharp Downturn In 2019 

Damien Boey, a research analyst at Credit Suisse, has warned that economic growth in Australia could slow quite sharply next year, raising the prospect that a slowdown could be immient.

Boey expects the recent growth spurt driven by strong infrastructure investment, could fade in the first half of 2019, and the risks associated with housing construction and household spending from the downturn in real estate could signal that the Reserve Bank of Australia’s rate hike cycle would have to be put on hold.

“Our view is that the economy is overshooting,” Boey said.

“We believe that growth will eventually slow as timely leading indicators [such as PMIs] are suggesting.”

Boey said infrastructure investments had driven the recent surge in economic activity.

“We think that the [economy] is still being supported by infrastructure,” he said.

“The latest Access Economics data for Q3 suggest that growth in the stock of infrastructure spending has re-accelerated. And recently, project spending growth has been remarkably positively correlated with the cycle in domestic demand.”

While actual infrastructure investment has been substantial, Boey did not expect the trend to last due to the lack of new projects in the pipeline.

“In 2018 to date, actual project spending growth has accelerated, even as the project pipeline has thinned out,” he said.

“It is in this sense that we think infrastructure spending growth has been overshooting, contributing to the overshooting we are also seeing in domestic demand growth relative to leading indicators,” Boey added.

“However, the more growth in spending we experience today, the more we also eat into future growth, unless policy makers are able to adequately top up the project pipeline.

“As the saying goes, ‘serenity now, insanity later’.”

…click on the above link to read the rest of the article…

Australians Face Huge Spike in Repayments as Interest-Only Home Loans Expire

Day of Reckoning: Hundreds of thousands of interest-only loan terms expire each year for the next few years.

The Reserve Bank of Australia (RBA), Australia’s central bank, warns of a $7000 Spike in Loan Repayments as interest-only term periods expire.

Every year for the next three years, up to an estimated 200,000 home loans will be moved from low repayments to higher repayments as their interest-only loans expire. The median increase in payments is around $7000 a year, according to the RBA.

What happens if people can’t afford the big hike in loan repayments? They may have to sell up, which could see a wave of houses being sold into a falling market. The RBA has been paying careful attention to this because the scale of the issue is potentially enough to send shockwaves through the whole economy.

Interest Only Period

​In 2017, the government cracked down hard on interest-only loans. Those loans generally have an interest-only period lasting five years. When it expires, some borrowers would simply roll it over for another five years. Now, however, many will not all be able to, and will instead have to start paying back the loan itself.

That extra repayment is a big increase. Even though the interest rate falls slightly when you start paying off the principal, the extra payment required is substantial.

Loan Payments

RBA Unconcerned

For now, the RBA is unconcerned: “This upper-bound estimate of the effect is relatively modest,” the RBA said.

Good luck with that.

The Inconvenient Truth of Consumer Debt

The Inconvenient Truth of Consumer Debt

It’s acceptable to build infinitely high levels of household debt — as long as rates never rise.
Ready for a rainy day?Photographer: Anoek De Groot/AFP/Getty Images

Oh, but for the days the hawks had a hero in Sydney. Against the backdrop of a de facto currency war, the Reserve Bank of Australia stood as a steady pillar of strength. The RBA held the line on interest rates, maintaining a floor of 2.5 percent, even as its global central bank peers drove rates to the zero bound and beyond into negative territory.

The abrupt end to the commodities supercycle drove the RBA to join the global currency war. The mining-dependent nation’s economy was so debilitated that policy makers felt they had no choice but to ease financial conditions. In February 2015, after an 18-month honeymoon, the RBA reduced its official rate to 2.25 percent, marking the start of a cycle that ended last August with the fourth cut to a record low of 1.5 percent.

The Bank of Canada has taken a similar journey in recent years. It embarked upon a mild tightening campaign in 2010 that raised the overnight loan rate from a record low of 0.25 percent to 1 percent in September 2010. The bank maintained that level until early 2015. Two weeks before the RBA’s first cut, the Bank of Canada lowered rates to 0.75 percent. The January move, which shocked the markets, was followed in July 2015 with an additional ease to 0.5 percent, where it remains today.

Bank of Canada Governor Stephen Poloz, who replaced Mark Carney after he departed to head the Bank of England, explained the moves as necessary to counter the downside risks to inflation emanating from the oil price shock to the country’s economy.

Two resource-rich economies reacting similarly to body blows is intuitive enough. They eased the pressure on their given economies.

…click on the above link to read the rest of the article…

Australian Housing Illusion Set to Burst

Australian Housing Illusion Set to Burst

Possibly driving an already weak economy into recession.

Every day, we have investment banks and others telling us that the Australian housing party is over. Estimates for price declines over the next year or so vary from  7.5% to a plunge of 25%.

Even the Reserve Bank of Australia is in on the act. But it is trying to put a positive spin on any downturn after having for years encouraged new house and apartment construction as being “good for the economy.”

The full impact of new housing supply will not be felt for a year or so. It is almost certain that there will be a major surplus when everything now under construction is complete. This is a bad omen for the Australian economy, where building and selling of houses and apartments has been playing an outsized role.

Macquarie Bank has estimated that new supply will be greater than 200,000 dwellings, whereas demand will be 170,000 to 180,000.

The effect: downward pressure on both house prices and rents; and possibly, an already weak economy driven into recession. There are many signs of a coming downturn:

  • For Sale signs are springing up everywhere.
  • Auction clearance rates continue to decline. In parts of Sydney it is down to 40%.
  • More properties are now being bought by investors, mostly domestic, than by owner-occupiers.
  • Household debt has soared, it is now around 140% of income.
  • The house-price-to-income ratio is a stratospheric 6.4 times.
  • Rental yield is now around 1% after costs.
  • Some banks have raised mortgage rates in an attempt to calm the market and are charging investors more than owner-occupiers.
  • The big four banks have recently raised $18 billion to help cover potential losses from the housing market.
  • Some sell-side analysts now have the big four banks as a sell because of housing exposure.

…click on the above link to read the rest of the article…

Australia’s “Black Swan Moment”

Australia’s “Black Swan Moment”

Wayne Swan,  Treasurer of Australia from 2007 to 2013, Deputy Prime Minister and the Deputy Leader of the Labor Party from 2010 to 2013, who thought he saved the Australian economy but just delayed the inevitable, is now blaming everyone but himself for the downward spiral:

image source: Twitter

Image source: Twitter

As I argued in my book Australia: Boom to Bust, Australia will eventually see a significant economic recession in the not too distant future. And all the data points are clearly indicating my worst fears on where the Australian economy is headed. But we have to ask who is responsible for this economic downturn, and which policy makers helped line Australia up for the collapse in capital expenditure.

Well, we can all try to blame Joe Hockey, Treasurer in the now defunct Abbott Government from September 2013 until September 2015, even though his approach was most definitely the icing on the cake, but unfortunately he was not Treasurer at the time Australia’s political elite truly made what could be two of the greatest (yet laughable)economic related mistakes in the history of Australian economics. And the blame lies with Wayne Swan, alongside the Reserve Bank of Australia (RBA), Treasury, and Australian Prudential Regulation Authority (APRA).

Mistake 1. Flawed Calculations

As per the chart above from the 2012 ‘Australia in the Asian Century White Paper,’ If there was ever such a stupid miscalculation by Australians, it was the forecast on how much iron ore Australia would need to extract from the ground to export to emerging nations such as China to fulfill their long term consumption requirements.

…click on the above link to read the rest of the article…

How Much Longer Can Central Banks Push Bonds to Absurdity?

How Much Longer Can Central Banks Push Bonds to Absurdity?

Central banks around the world have fallen all over each other lowering their benchmark interest rates. On Tuesday, the Reserve Bank of Australia was the latest, cutting its cash rate to an all-time low of 2.25%. It didn’t mince words: “A lower exchange rate is likely to be needed to achieve balanced growth in the economy.” A rare admission of escalating the currency war. The Aussie dollar immediately swooned.

Two weeks ago, the Bank of Canada suddenly cut its overnight interest rate by 25 basis points. Other central banks have chimed in. Japan’s rate has been at zero for years. “Negative deposit rates” have infected a number of central banks, including the ECB.

In this environment, the Fed is talking about raising rates from zero to next to zero, but the markets are not following its hints and are trying to force it to back off.

Ten-year government bond yields in Japan and Germany dropped closer to zero, before bouncing off in a sharp rally to 0.39% and 0.31% respectively. This is called the “Japanification of Germany.”

Back in August 2013, when 10-year JGBs still yielded around 0.8%, I wrote, Why I’m Deeply Worried About Japan – And Why Betting On The Collapse Of JGBs Is A Horrible Idea, which has become a leitmotif. Japan’s fiscal situation has deteriorated since, but JGBs have risen and yields have dropped, with shorter maturities sporting “negative” yields. JGB shorts have been kneecapped. Inflation is 2.4% as measured by the all-items index, and 3.1% for goods. Financial repression has become the rule.

…click on the above link to read the rest of the article…


Australian dollar skids to six-year low after RBA shock

Australian dollar skids to six-year low after RBA shock

(Reuters) – The Australian and New Zealand dollars weakened further in early trade in Europe on Tuesday after a sell-off following the Reserve Bank of Australia’s surprise decision to cut interest rates.

The outlook for both Antipodean currencies has worsened in recent weeks with concerns about growth generating expectations of generally looser monetary policy, but the RBA’s decision still came as a shock to many.

Another burst lower as Europe came on line brought the Aussie’s losses on the day to more than 2 percent. It hit an almost 6-year low of $0.7635 while the kiwi fell 1.5 percent to $0.7185, its lowest since early 2011.

“Its a big move and I think any bounce should be sold into,” said Graham Davidson, a spot trader with National Australia Bank in London.

“Generally when the RBA move, they tend to cut a handful of times. The feeling is of aneconomy where there is no source of growth, almost of despair.”

…click on the above link to read the rest of the article…


Australian dollar plunges as rate cut bets rise, commodity prices sink

Australian dollar plunges as rate cut bets rise, commodity prices sink

The Australian dollar plunged again overnight, as falling commodity prices dragged it to a fresh five-and-a-half-year low.

The local currency fell as low as 77.17 US cents, as a combination of strong US data boosting the greenback and falling commodity prices hurting resources exporters, before bouncing back to 77.85 by 10:30am (AEDT).

The Aussie dollar has now lost the best part of 3 cents against the greenback over the past couple of days, after having rallied on Wednesday afternoon due to higher-than-expected Australian inflation figures.

While US dollar strength has played its part, the Commonwealth Bank’s chief currency and rate strategist Richard Grace told ABC News Online that price slides for copper and other metals weighed more.

“All the commodity currencies fell last night – that is the New Zealand dollar, Canadian dollar, Australian dollar – so they fell much more than the European currencies.”

The other major factor behind the Aussie dollar’s rapid decline has been an article from Herald Sun economics columnist Terry McCrann saying that a Reserve Bank rate cut next week is all but certain.

…click on the above link to read the rest of the article…


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