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27-09-2015, 07:53 AM
Seven years on, investors forget harsh lessons from Lehman collapse
DateSeptember 15, 2015
[Image: 1428969254351.png] Ruth Liew Reporter [Image: 1442293187644.jpg]
Governments have almost exhausted the levers they have in terms of what they can do to help stimulate economies.
It's been seven years since the collapse of Lehman Brothers that helped spark the global financial crisis, but experts are now warning that a second GFC may be on the cards as investors remain in debt and forget the lessons of the past. Tuesday marks the seventh anniversary since the destruction of Lehman Brothers, after theinvestment banking giant filed for the largest bankruptcy filing in US history. Equity Trustees executive general manager corporate trustee services, Harvey Kalman, said what investors had learnt from the collapse was yet to be fully determined. [Image: 1442293187644.jpg]
Data from Investment Trends showed more than one out of two Australians say another global financial crisis could be on the way. Photo: iStock
Lehman had borrowed large amounts to fund its investments, including leveraging and gearing assets, during the years leading up to its demise in 2008. A large chunk of the funds were poured into housing-related assets, which failed following the housing collapse in the US. "Seven years on, there are more controls over the way collective investment product suppliers operate, although it is arguable whether these have gone far enough," Mr Kalman said. "In my view a case in point is smaller asset managers that operate a responsible entity where the separation of function is difficult. The regulations are not yet strong enough in this area," he argued. Matthew Walker, a financial adviser and director at WLM Financial, said Australian investors were heavily in debt with real estate, and some asset managers were also leveraged – indicating many might have forgotten the problems of the past. Data from the Reserve Bank of Australia and Australian Bureau of Statistics show that the percentage of debt to household income was higher than 150 per cent today, compared with about 150 per cent in 2008. "No, I don't think we've learnt the lessons from Lehman. Debt seems to be high, and it's prevalent now. The saving grace is that we're in a low interest environment but we know that that could change at any moment – and what would happen then?" he said. Mr Walker's clients have been busy trimming their exposure to risky assets such as shares, and holding more alternative assets and cash as they brace for another potential GFC. Governments have almost exhausted the levers they have in terms of what they can do to help stimulate economies, while low confidence and anaemic global growth would add fuel to the fire. The comments come after new data from research house Investment Trends showed that more than one out of two Australians say another global financial crisis could be on the way, and numbers among the top three biggest fears that would affect their investment returns. Worries about a market crash or second GFC ranked behind China's slowdown and a worsening Australian economy, the data showed. "Compared to August last year, there's been a significant increase in fear levels among active Australian investors 12 months on," said Recep Peker, head of research for wealth management at Investment Trends. Financial adviser Mark Draper, from Gem Capital, noted that housing debt levels in Australia for example are now back at levels that are higher than before the 2008 crisis. "My view is that Australians are continuing to bet that house prices will continue to be a one-way bet higher, and are prepared to borrow for it," he said. "One of the things that provides some comfort at the moment is that there is still a high level of fear among investors – major crisis events tend not to happen when fear levels are so high." Mr Kalman argued that the focus on the financial services sector and the loss of investor confidence that followed the Lehman collapse did bring some benefits to Australian investors. Some of these included reforms such as the Future of Financial Advice and Stronger Super, which were still being rolled out and helped buffer investors from massive economic shocks. "While it is impossible to legislate against greed, after the unprecedented focus on the financial services sector's shortcomings, it would be a terrible indictment of it, our legislators and our regulators if we are again facing the same sort of problems that emerged with the Lehman Brothers' collapse," Mr Kalman said.
27-09-2015, 07:55 AM
NaN of [Image: 1442296052466.jpg]Not all tech giants have proven business models. Some have succeeded in monetising their strengths while others are yet to see a profit. by Matthew Smith The social media phenomenon known as Twitter may well be ubiquitous, with everyone and everything from household brand names to popular television personalities all finding ways to leverage the short messaging platform. But that’s no reason to add the New York Stock Exchange-listed company to your portfolio. Twitter’s plight – from its strengths to obvious challenges – is symptomatic of the new breed of high-profile technology companies that have crashed to earth a short time after listing on the stock exchange. The 140-character broadcasting platform has become the means through which many people consume news, and yet has also become a catalyst for news itself: Twitter is now the platform at the centre of civil disorder, corporate activism, celebrity meltdowns and countless hours of workplace procrastination. Given the company’s expertise in delivering soundbites neatly packaged for media consumption, it should come as no surprise that its public float was one of the most hyped events in sharemarket history. Following its November 2013 IPO at $US26 per share, Twitter stock debuted at $US44.90. Within six weeks Twitter’s share price went as high as $US73.31. But once the exuberance of the float gave way to the daily business grind, hype about the Twitter story leaked and a share price decline ensued. Twitter’s shares appear to have found a new support level back at about its original listing price of $US26 a share. At this level, Twitter’s $US18 billion ($24.4 billion) market capitalisation puts the company in the same category as Woodside Petroleum and Woolworths. Many professional investors, such as Platinum Asset Management portfolio manager Alex Barbi, are openly sceptical. “Twitter is a good example of a stock that’s been super hyped; there’s visibility all over because everybody is Tweeting, but it doesn’t seem to be able to make money. The valuation is excessive in my opinion,” Barbi says. ELUSIVE PROFITS Twitter makes most of its revenue from the sale of its advertising services – that is, promoted Tweets, promoted accounts and companies paying for their messages to appear in the Twitter feeds of targeted audiences. It also earns some of its money by licensing data to companies trying to make sense of the chaos. The company turns over substantial revenue but is yet to make a profit. According to its 2014 annual report, Twitter produced revenue of $US1.4 billion but reported a net loss of $US577.8 million. In the first quarter of this year it reported revenue of $US312 million and losses of $US144 million. In the second quarter it reported revenues of $US502 million and losses of $US136 million. Twitter wants to sell more advertising services as well as its data feeds to developers, but in order to do this it needs to increase its circle of influence. While 98 per cent of the population in the company’s key markets are aware of Twitter, only 30 per cent of people in these markets actually use the platform, a statistic Twitter’s interim chief executive, Jack Dorsey, described as “disappointing” during an analyst call in July. “We’ve still only managed to attract technology users and first movers and haven’t grown into the mass market,” he commented. Given that the global sharemarket rout pushed stocks deeper into the red in late August, questions are now being asked about whether the speed bumps that companies such as Twitter are encountering are merely blips on the path to profit or the start of an entirely new and challenging phase for technology companies. TRIPLE YOUR MONEY In comparison with Twitter and other recent technology sharemarket debutants such as LinkedIn and Netflix, more established global tech giants such as Apple and Google are making significant profits. Apple posted quarterly revenue of $US49.6.billion to the end of June and a $US10.7 billion net profit for the period, or $US1.85 per diluted share. Apple makes most of its money from the sale of its iPhone handsets. Meanwhile, Google’s advertising-based business model, which bears more similarities to Twitter’s business model than that of Apple, made a $US3.93 billion profit. Google’s pay-per-click model continues to generate strong revenues thanks to its broad reach into the mass population – which has, in turn, seen Google’s share price double over the past three years. Apple shareholders have done just as well. Investors who bought Apple just four years ago would have tripled their money based on today’s share price. Both of these more established tech giants exhibit qualities that are almost unique among their so-called peers. They both have proven business models, they both deliver profits that are in line or above expectations and they both trade at lower multiples than the newer and riskier market entrants do. Apple stock trades on 17 times 12-month forward price-earnings multiples, while Google’s forward multiple is 33 times and Twitter’s stock trades at 65 times. NEW LEASE OF LIFE Google, in particular, found a new lease of life and a renewed interest among the tech-wary Wall Street investment community this year, with the appointment of former Morgan Stanley chief financial officer Ruth Porat. Google’s new structure, in which its search business is renamed Alphabet and more transparency is given to some of its other less profitable pursuits, means the company is being praised for its appeal to, and is being rewarded by, the market. “Now the market can see the long-term investment being made on some of the other businesses, such as smart contact lenses and driverless cars, there will be pressure to make those divisions perform, spin them off or maybe doing JVs [joint ventures] with other companies,” Platinum’s Barbi says. Google is the biggest position in the benchmark-unaware Platinum International Technology Fund. “It’s a company the retail investor can be reasonably comfortable being invested in. You have exposure to it every day and you know there’s a big engine for growth,” he says. Until the recent restructure, Google had been underperforming – trading sideways for almost the past two years – as the company struggled with the large migration of users from desktop to mobile. Stephen Wong, Mutual Trust’s senior portfolio manager, says the evergreen appeal of Apple, the world’s largest company, is based on its ability to continually create and reinvent product categories that are able to seamlessly integrate with each other. Wong, who builds a global portfolio of direct shares for the Melbourne-based family office, has been a buyer of Apple. “This [Apple] ecosystem spans the entire digital spectrum – from your phone, tablet, watch, PC and laptop on the hardware side, to the integrated operating system, app store, iTunes, Apple Pay and, more recently, Apple Music,” he says. “We believe the customer loyalty that this ecosystem builds is significant and a key driver of the sustainability of Apple’s growth.” Following the recent sell-off in US markets, in which the Nasdaq took the biggest tumble, Google shares lost some of their recent gains, falling more than 11 per cent. Apple shares were hardest hit, falling 22 per cent before bouncing back after consecutive days of plummeting. EARLY VERSUS MASS ADOPTION The savage share price falls in the US tech sector are a timely reminder for investors to look beyond the buzz and seek out real growth, says Rupal Bhansali, Ariel Investments’ international and global equities chief investment officer. Speaking from her New York headquarters, Bhansali points out that tech names that have established business models and are responsible for driving their own destinies will continue to recover from volatile markets, while the so-called “buzz stocks” still have a lot to prove in relation to growing and earning revenues from their addressable markets. “[Internet] search is not a niche; it’s developed into a mass market model and it will continue to spur on growth for companies within the segment,” Bhansali says. She highlights world-beating companies such as Google and China’s Baidu as being likely to benefit from the continued growth of this business segment. Meanwhile, heavily hyped themes that to date have proved to be disappointing among large and burgeoning large-cap tech companies in the United States include cyber security, virtualisation, big data, business intelligence, 3D printing and e-commerce, Bhansali says. “Some companies may have achieved early success and have listed on market exchanges with enormous valuations because they are early adopters, but I don’t see the mass adoption for these businesses,” she says. Within these categories she mentions professional networking platform LinkedIn, and points to the poor market debut of China’s great e-commerce play, Alibaba Group Holding, which has recently breached its IPO price of $US68. BENEFITS OF THE NETWORK EFFECT While the valuation of LinkedIn Corp appears outsized when compared with its core audience, Alibaba’s e-commerce play has come to market at a time when investors are drawing a question mark over the pure digital shopping business model. For example, eBay makes money mostly from sellers by taking a cut of their sale and charging more for bigger pictures and prominent listings. Amazon.com and Alibaba, on the other hand, have a much broader range of business interests. Amazon is able to leverage relationships with its online community and has successfully shown its ability to push into new areas, such as its web services business and its cloud-computing platform, AWS. However, high expectations for pure-play e-commerce companies have not played out, with established US bricks-and-mortar retailers including Macy’s, Nordstrom and Wal-Mart Stores beginning to enjoy online success after a few false starts. Meanwhile, established online marketplaces eBay and Amazon have consolidated their respective first-mover advantages and are now reaping the benefits of the network effect, giving them the ability to invest to move with the times. The network effect means online marketplaces with the largest user bases naturally benefit from their ubiquity: sellers want to go to the platform with the most buyers, while buyers benefit from access to more sellers. Well-known American investors Carl Icahn, Seth Klarman, Dan Loeb, Donald Yacktman and Larry Robbins all own considerable stakes in eBay, having been attracted by the business’s extremely high, free cash flow and capital-lean model. In 2014, eBay’s Marketplace business – its main auction business – generated $US2.7 billion in cash flow on $US3.5 billion in assets deployed. MATURE TECH PLAYS Amazon.com, listed before the 1999-2000 tech boom and bust, is considered the benchmark for global tech companies and the leader in the digital marketplace segment. But Barbi says investors have more to lose than gain from an investment in the company, even though he likes its mix of growth and underlying cash flow generators. “I’m not going to buy Amazon now – Amazon is another poster child of the internet. You definitely know the strength of the platform and the success they have had in retail. But where to from here?” he wonders. Scott Galloway, founder of digital advisory firm L2 and a professor of marketing at New York University, considers Amazon a candidate ripe to make a transformative acquisition in order to move from a pure-play e-commerce platform to something more, because “pure play no longer works”. “Amazon is the ultimate ubiquitous platform – the idea about being the biggest is that no other company can compete because it has the lowest cost of capital. But can it be disrupted? What if ride-sharing companies can start delivering packages?” he asks. While the likes of eBay and Amazon are now considered “mature tech”, both companies still have the ability to grow, according to Perpetual global equities analyst Thomas Rice. “We avoid the less predictable [technology] stocks,” Rice says. “Those stocks tend to have higher P/E multiples …You really have to have a view on how they will grow over a long period to invest in them and there’s a real chance those companies could be upset along the way. “We have a lot of confidence in the predictability of Google’s earnings. Since the [management] change I think a lot more of the opportunities have been unmasked.” Rice adds that the search engine pricing model employed by Google and Alibaba is appealing because revenues are driven by competition for keywords, which users bid on to secure the top results. FURIOUS DEAL-MAKING For some investors, picking winners and losers in the modern technology arms race, in which companies build value based on the size of their user base, is a risky game. In the “less predictable” category, Rice lists LinkedIn and online movie streaming service Netflix. He likes eBay for its ability to continue to capitalise on its market leader position and adapt as the environment for its service evolves. In particular, Rice says, both eBay and the recently spun-out PayPal business are well positioned to capitalise on the growing use of mobile technology. PayPal is furiously doing partnership deals with retailers who “accept” electronic PayPal payments as it begins an ambitious journey to disrupt one of the most entrenched and profitable oligopolies on the planet: the banks. Meanwhile, eBay has continued to evolve its mobile platform technology to appeal to users, who are increasingly comfortable with making mobile purchases. “The separation [of eBay and PayPal] seems to be quite a good idea based on performance and they seem to be going in different directions of their growth – for eBay it’s e-commerce; for PayPal it’s payment systems through explosion of e-commerce globally,” Barbi explains. Of the two names, Barbi says PayPal has the greatest upside potential based on its ability to leverage a trusted brand while undercutting the banks. “The question is, will the user switch [from credit cards to digital payments]? … I can take my [Visa] credit card out and payWave; it only takes one second,” he says. “But maybe people will stop using credit cards and use the wallet on the phone because it will be bundled with loyalty points. We will begin to see the ultimate value of a business like PayPal reveal itself.” MORE THAN JUST LIKES Of all the technology companies, both new and mature, Facebook could hold all the cards when it comes to addressable audience and continued future growth, according to L2’s Galloway. A testament to their scale, the combined market capitalisations of the big four tech companies – Amazon, Apple, Facebook and Google – totals $US1.3 trillion, or about $US5 million of value per employee. “Tracking you [as a user] specifically by your own identity is the real war: Facebook can track you and then serve you ads across platforms even if you’re not on Facebook. That’s powerful. Google can’t compete in this app economy,” Galloway says. Observers have alternatively lauded and lampooned Facebook’s purchase of WhatsApp, a free text, picture and video messaging service it bought for $US19 billion in February last year. The 700 million users it gained with the purchase, however, will come in handy as it seeks to extend its user base and reach into the broader population. The company wants to redefine how people communicate and, in the process, give companies more effective ways to advertise to their target markets. Facebook messages are replacing email and soon Facebook will own the text and talk space too, Barbi says, which is also changing the way telecommunications companies price their data services. “Facebook has been able to build multiple products starting with the simple news feed, [then] videos inside the application, rolling inside the news feed. And then they started linking other websites, so when you are logged into Facebook, Facebook knows where you are going,” Barbi says. “All this has to do with expanding its addressable market. They started off charging entry level prices [to advertisers] but, now they have expanded their user base, they are able to charge more and more.” BEWARE THE BANDWAGON The lines are blurring as to which verticals technology companies are moving into and disrupting. Because of this, Wingate Asset Management CIO Chad Padowitz prefers to steer clear of the big-name tech companies. “The early days where you could take 50 per cent market share are gone,” he says. “If these bigger names are going to disrupt something now, it needs to be big enough to make a difference. And the pace of change is quite dramatic now, meaning you can find yourself on the wrong side of consumer preference.” While most investors dipping into world-beating tech names might be willing to pay up for a bit of “blue sky” to get an early bite in the next big thing, most experts will caution that modern-day tech investing requires more than drawing the dots between current and future potential earnings. Long-term investors in global technology stocks will always believe that earnings ultimately prove them right and support further share price growth. The tricky part is balancing the price paid against the certainty of that growth appearing. “While it is fashionable in the technology sector to focus on more granular metrics such as user growth, user engagement and revenue growth, in the end the fundamental long-term earnings that the company generates will determine its value,” Mutual Trust’s Wong says. Barbi agrees: “This is not like 1999-2000. Things have to make money to make returns.” His advice to investors? Don’t jump on the bandwagon. “Do the research yourself; use the products. Look at the interface and how it’s making money. It may be good for you, but how big is its addressable market and how is it making money?”
29-09-2015, 01:20 PM
Global recession fears 'too gloomy', says Lombard Street Research
DateSeptember 29, 2015 - 1:54PM
Rose Powell and Vesna Poljak [Image: 1443498869096.jpg]
Governments have almost exhausted the levers they have in terms of what they can do to help stimulate economies.
Fears of an impending global recession are overblown, say the researchers at an economics insights group, because the US and European economies are looking increasingly resilient, despite China's slowing. Earlier this month, Citigroup's top economist Willem Buiter said there was a "high and rapidly rising risk" of recession as the global economy slows sharply next year and this could evolve into a recession as policymakers would likely move to slowly to avert the crisis. "This is the classical recipe for a recession in capitalist market economies," Mr Buiter said. "This time is unlikely to be different for China. Policy options to prevent a recession exist but are, in our view, unlikely to be exercised in time." However, Lombard Street Research director for Australia and New Zealand Matthew Williamson said this position was far too gloomy as major economies proved more resilient despite the significant decline in emerging markets. "For a global recession in 2016, we would need to see a much more extreme deterioration in investor sentiment. While possible, that is not a likely outcome," Mr Williamson said. Earlier this month, economists at Barclays lowered their expectations for Chinese growth, cutting 2015 forecasts to 6.6 per cent from 6.8 per cent and by even more in 2016 – from 6.6 to 6 per cent. Mr Williamson said they were not expecting 2016 to be easy however. "We expect a slow-burn emerging market crisis rather than a 90s-style crash. While the shock to global GDP is potentially large, certainly larger than in 1998, the impact on the US and Europe looks manageable. Direct trade and financial links are still fairly modest, while lower oil/import prices should provide crucial support to consumers." Those who are forecasting a global recession do not argue the big advanced economies such as the United States and those in the euro area would enter their own, but rather the combined force of China and associated emerging markets entering recession would drag enough on larger economies to slow global growth significantly. A global recession does not require outright negative growth or a minimum length of time, and is instead defined by the International Monetary Fund by a decline in growth to 2 per cent as economic indicators lag and do not factor in the growing population entering the economy. Emerging markets now make up between 40 to 60 per cent of world GDP. But they have been hit hard by the slump in commodity prices. Also concerning for many emerging markets, such as South Korea and Taiwan, is that their major trading partner is China, which will slow. The International Monetary Fund has already downgraded its forecast for global growth in 2015, from 3.5 per cent to 3.3 per cent. "We have entered a period of low growth," IMF chief economist Olivier Blanchard said in July as he explained the changed forecasts. But earlier this week its chair Christine Lagarde said even this goal was not realistic. "We are in a recovery process whose pace is decelerating. There is a shift between emerging countries and developed countries. The first ones, who were driving a global recovery not so long ago, are slowing down. The others are seeing their momentum accelerate. This should lead us to revise downwards our growth forecasts," Lagarde told Les Echos in an interview. Mr Williamson also said growth had slowed rather than entered an outright global recession. "Even now, markets remain jittery with some economists warning of an EM-led global recession in 2016. Overall, we are more sanguine about global economic prospects and think talk of a recession is premature," he said. "The most serious risk comes from China but we do not think China's weakness poses a threat to wider global stability, not least because the country's credit bubble has been funded by domestic savers rather than international lenders, which distinguishes it from the US subprime crisis."
30-09-2015, 07:43 AM
It’s not just about China and Glencore: debt is spooking markets
Alan Kohler [Image: alan_kohler.png] Editor-at-large, ABR Melbourne [b]The latest clunk down in global and Australian share prices is not just about slowing Chinese growth and Glencore’s frailty, although both of those are real enough.[/b] At the heart of what’s happening is the huge rise in world debt since the GFC coupled with the manifest failure of central banks to stimulate the real economy despite six years of virtually zero interest rates and printing money. Glencore declared last night it had “absolutely no solvency issues”, it is confident about the medium- and long-term future of commodity markets, and was cutting debt by “up to $US10.2 billion”. Its share price bounced 20 per cent. Tomorrow, perhaps, markets will wonder why the company is reducing debt by 20 per cent if there are absolutely no solvency issues or any concerns about commodity prices. Whether or not Glencore itself is facing problems, it has focused more attention on the entire resources sector and specifically whether the losses from the bear market in commodity prices will start to extend from shareholders to lenders via bankruptcies of small- and medium-sized producers. In China it’s clear from the latest data that the modest economic rebound in the second quarter will be short lived and that Q3 will see growth fall below 7 per cent and to 6 per cent next year. Following the 42 per cent share market correction, the financial sector has joined construction and heavy industry in the slowdown, along with exports and consumption. The failure of the People’s Bank of China to move the dial on growth despite cutting interest rates to all-time lows is symptomatic of the key global problem in 2015: not only have central banks not been able to generate growth and inflation despite throwing a party for financial speculators, they may have made things worse. According to the Bank for International Settlements’ latest quarterly review issued two weeks ago, total debt (household, corporate and government) in the advanced economies is now 265 per cent of GDP, compared with 226 per cent in 2007. For Australia it’s a little below average at 230 per cent of GDP, up from 197 per cent. (By the way, according to the BIS figures, most of Australia’s increase has been government debt.) China’s total debt stands at 235 per cent of GDP, up from 153 in 2007, Japan’s is now 393 per cent, up from 316, euro area 270 per cent, up from 225 and the US’ total debt stands at 239 per cent of GDP, up from 218. Emerging economies generally have increased total debt from 117 per cent of GDP to 167 per cent. The only countries to have reduced total debt as a percentage of GDP are Argentina and India, and in each case the reduction is just 1 percentage point. There are two problems with this: first monetary policies have taken wealth from savers and given it to borrowers — what Keynes called “the euthanasia of rentiers”, and second, the debt thus encouraged itself weighs on real economic growth. Quantitative easing, commonly described as the “Fed put”, has favoured speculation over capital investment and produced a global bond bubble that has fed through to all asset prices via what’s known as the capital asset pricing model, which is built on the Government bond yield, or “risk free rate”. Central banks are now in a bind. Having encouraged a massive increase in leverage and asset prices they can’t raise interest rates without derailing growth. So the Federal Reserve had to put off its well-flagged September rate hike, the European Central Bank has signed a pledge recommitting itself to stimulus and central banks in Norway, Taiwan and, last night, India, have announced big rate cuts. What markets can see is that after six years of blazing away at recession and deflation, the big central banks are now out of ammunition. Meanwhile the enemy continues to advance. Now what? Separately, far from reducing debt levels since the credit crisis and recession of 2008, the debt overhang has only increased — a lot — which has had its own deadening effect on growth. Debt reduces the ability of consumers to spend, business to invest and governments to build infrastructure. Lower interest rates don‘t stimulate activity because nobody can borrow any more, and in fact the focus is to reduce investment to get debt down: Glencore is far from alone. As the head of the BIS monetary and economic department, Claude Borio, said at the press conference announcing the quarterly review: “Hence a world in which debt levels are too high, productivity growth too weak and financial risks too threatening.” 
30-09-2015, 08:53 AM
(This post was last modified: 30-09-2015, 08:55 AM by Life is a game.)
debt is asset. there is no way to pay it down but keep printing and keep inflating the debt thus inflating the asset and pass on the musical chair to the next generation. which is why life is a game. A game of musical chair
 The game has to go on otherwise there will be serious consequences (far serious than anyone of us can shoulder). Sent from my SM-N9005 using Tapatalk
Using Tapatalk
01-10-2015, 08:10 AM
NaN of [img=620x0]http://www.afr.com/content/dam/images/g/j/x/a/s/b/image.related.afrArticleLead.620x350.gjyfkx.png/1443650642211.jpg[/img]Savers were looking to diversify into higher income bearing assets such as shares and property because of the paltry return available on cash. Craig Sillitoe by Sally Patten Savers are shunning term deposits despite the sharp falls in equity markets. Term deposits held by the banks fell 5.7 per cent to $510 billion in the year to August, CommSec noted on Wednesday. Money held in term deposits has now fallen in annual terms for 21 months, the longest losing streak on record. CommSec economist Savanth Sebastian predicted it would take a big jolt, such as the collapse of a miner Glencore, to entice yield-hungry investors back into cash. In the meantime, he said savers were looking to diversify into higher income bearingassets such as shares and property because of the paltry return available on cash. "The psychology around lower rates is here to stay. People are still chasing yield. Even in this volatility, investors are still interested in chasing the banks and Telstra," said Mr Sebastian. Financial advisers agreed that low interest rates were prompting investors to move out of cash when their term deposits matured. The shift was exacerbated by predictions that Reserve Bank of Australia might lower the cash rate by another 0.5 percentage points over the next six to nine months. Graeme Yukich of Entrust Private Wealth said investors were reluctant to roll over term deposits when the new rates were about 2.7 per cent, considerably below the 3.5 per cent on offer three years ago. Mr Yukich said investors had calculated that they could earn three times as much yield on bank shares as they could leaving money in cash. "Over the next five years you could lose half your money on Commonwealth Bank of Australia shares and still be ahead," Mr Yukich said. Bank stocks are currently yielding between 8.5 per cent and 9.5 per cent. Chris Morcom of Hewison Private Wealth noted that in some instances it was possible to obtain higher yields on at-call cash accounts than on term deposits, while the tightening of the rules on term products by the Australian Prudential Regulation Authority was also making term deposits less appealing. Since January this year the ability to break term deposits has become significantly harder due to a requirement for the banks to hold sufficient liquid assets to cover lending outflows for a month of turmoil. "Term deposits have become more restrictive. Why lock in money at low rates with no flexibility?" Mr Morcom said. Mr Morcom noted that the extended period of low cash rates was beginning to hurt savers. "They can cope with lower rates for a little while, but now they are wondering when it is all going to end," he said. Mr Sebastian suggested that besides the banks and Telstra, investors were also picking up high yielding industrial infrastructure assets, such as Sydney Airport.
01-10-2015, 10:04 PM
(01-10-2015, 08:10 AM)greengiraffe Wrote: In practice, if investors sell down the shares by 50%, it most probably indicates some extreme conditions where dividends are high probable to be cut/suspended. High dividend yields in the absence of an evident crisis most probably indicates that the market has already priced in something - return of capital or the FCF wouldnt be able to maintain similar dividend payout....as Nick had warned in the MIIF thread....It would be easier to believe high dividend yields in the presence of an evident crisis. A case in point - An investor buying into MIIF in 2007 was enjoying ~8% yields, and if another bought in 2008/9, it was paying out ~11-15% yields....In both cases, absolute dividends continue to be cut thereafter but it is no surprise which investor came out better eventually.
03-10-2015, 08:14 PM
Low inflation and interest rates challenge economists
Adam Creighton [Image: adam_creighton.png] Economics Correspondent Sydney [Image: 832989-1d61d0f2-68fa-11e5-9bb9-94d25a90b8df.jpg] Source: TheAustralian [b]The most important price in the world, the price of money, has been trending toward zero, and in some countries below that, with seemingly little prospect of reversing.[/b] The world’s major central banks slashed their policy interest rates to zero in the wake of the global financial crisis and pumped $US14 trillion of new money into their banking systems to try to spark economic growth. In the years since it’s been a trying time for them. Not only has growth remained sluggish but inflation, which low interest rates are meant to encourage, has only limped along. Indeed, across advanced countries it has also started heading toward zero. “The forward interest rate curve, which represents the market forecasts of inflation and interest rates, the US Congressional Budget Office, just about every private forecaster including me, and Federal Reserve forecasters themselves, has been wrong seven years in a row,” says John Cochrane, a professor of finance at the University of Chicago. “We all keep expecting the fast growth of a normal recovery, and it keeps not happening.” Cochrane and Charles Goodhart, a professor of economics at the London School of Economics and a former member of the Bank of England Monetary Policy Committee — two of the world’s most distinguished economists — both expect interest rates to rise again and question the increasingly popular refrain of “secular stagnation” — that low interest rates reflect the West’s permanent and deleterious economic funk. The US Federal Reserve, ringmaster of global interest rates, has for nine years held its policy interest rate at zero. Last month, once again, it baulked at lifting its policy rate by even 0.25 percentage points. “Increasing by 12.5 basis points would have been better — there’s so much uncertainty about the timing of the first increase and the Fed has just perpetuated it, undermining confidence,” says Goodhart. This prolonged period of ultra-low interest rates — even in Australia, whose relative economic riskiness has long required a higher level of interest rates to attract global investors, the government enjoys a 10-year real borrowing rate of about 0.6 per cent — has fuelled much worry among some economists who believe such rates encourage excessive risk-taking, misallocation of funds and financial bloat. “It’s a problem. The very low rates are grinding the financial system and households into higher debt, in the wrong direction,” says Goodhart, alluding to the Bank for International Settlements’ increasingly strident criticisms of monetary policy in the US and Europe. “It’s not so much whether the BIS criticism is right — it’s undoubtedly right — but it’s a practical question of whether can you raise interest rates when macroeconomic conditions don’t cry out for it but asset prices do,” he adds. “How do we get out of this without a major financial collapse? It’s a very difficult question.” While house, stock and bond prices have soared from Sydney to New York, fuelling concern about bubbles, these are not the inflation measures central banks look at. “To the average person housing is one of the main expenses they face, and not to include it (in inflation) is a very questionable decision,” Goodhart notes. The combination of low unemployment and weak consumer price inflation explains the Fed’s hesitation to lift rates. Stripping back the mumbo jumbo, monetary policy is still informed by a “Phillips Curve”, a famous relationship mapped out by a New Zealander in the 1950s that showed a longstanding, negative relationship between inflation and unemployment: the more jobs, the higher inflation (because people spend their wages). Central banks believe low interest rates boost economic growth (and therefore employment) but they have been bracing in vain for a bout of inflation. “At the extreme it’s true — massive unemployment above about 10 per cent or low unemployment below 2 per cent — then the curve will hold,” Goodhart contends. But jobs, growth or inflation do not appear to have responded much to the central banks’ decisions. “We thought low interest rates would cause inflation to go up, but actually inflation has gone down. This fact suggests that inflation will adjust to the level of interest rates set by central banks,” Cochrane explains, hinting that a big chunk of economic theory and belief in central bank potency could be wrong. Pinning down cause and effect in macroeconomics is hard because experiments can’t be run — and even if they could, biases about whether government can or should get involved in the economy tend to intrude. In any case, it is the real interest rate that matters most for economic activity — the nominal interest rate minus the rate of inflation. A new study by Hamilton, Harris, Hatzius and West — four economists from Goldman Sachs and US universities — has reassuringly shown this period of low real interest rates isn’t unprecedented, or in all likelihood permanent. Investigating the history of rates, inflation and growth over the past 200 years across 21 countries, they conclude that pessimists have confused “a delayed recovery with chronically weak demand”, and expect rates to rise noticeably within 10 years. They show convincingly that a positive link between real interest rates and economic growth, which underpins the secular stagnation argument, is not born out in fact. That is, low rates do not imply or foreshadow stagnant economic growth. As for the gradual downward trend in the real rate of interest, they note that life expectancy has gradually crept up, rising around 20 years between 1850 and 2000 in rich countries. A shorter life means less willingness to forgo consumption today (by lending money to others), and therefore higher interest rates. Even if low rates were semi-permanent, is this so bad? Pessimists say Japan, a country that has had very low interest rates and inflation for decades, is the harbinger of the West’s economic development. “So what?” says Cochrane. “With a minuscule unemployment rate it does not look like it is suffering … and you can’t blame 20 years of slow growth on money anyway. Zero interest rates and slight deflation are just about perfect monetary policy.” The Japanese government’s proclivity to borrow might even presage higher interest rates. “Yes, Japan and the US have very low interest rates now. But Japan today could be Greece 2007; things look like they can go on forever until they don’t; and they unravel quickly if people see the endgame and want to get out first,” he says, pointing to government debt levels of 100 per cent of GDP in the US and 200 per cent in Japan. “The next big shock will not be the Fed raising rates 25 basis points, it will be China or a war or Greece,” he adds, suggesting the obsession with the Fed’s pronouncements was amusing given how little impact it had on interest rates. For his part, Goodhart expects demography to underpin rising interest rates. “Over the next five years it’s quite possible we will have interest rates that are markedly lower than in the past but once we get beyond there, the demographic trends will move strictly against ‘lower for longer’,” he says, Goodhart argues that falling wage growth and interest rates since the 1980s have stemmed from the entry of Chinese and eastern European workforces into global supply chains, causing a doubling of the effective global workforce from the 1990s that lowered wages and increased inequality. But as the world’s population ages and fertility declines this process might reverse.
08-10-2015, 11:21 PM
Turmoil warning from IMF over debt blowout
Adam Creighton [Image: adam_creighton.png] Economics Correspondent Sydney [Image: 674558-e5bd9cda-6dae-11e5-b3da-9dc16b8ce769.jpg] IMF’s top financial counsellor Jose Vinals says ‘policy missteps or adverse shocks could result … in prolonged global market turmoil that would ultimately stall economic recovery’. Source: AP [b]Ultra-low interest rates have fuelled a borrowing binge in emerging markets that risks prompting another bout of financial turmoil once they begin to rise, the IMF has warned.[/b] As central banks dump US government bonds to shore up their beleaguered currencies, the IMF has singled out emerging nations’ $US18 trillion ($25 trillion) corporate debt burden — a quadrupling in 10 years — as a key risk to global growth. “Balance sheets have become stretched thinner in many emerging market companies and banks,” the IMF said in its latest report on global financial stability. “Emerging markets face substantial challenges in adjusting to the new global market reality from a position of higher vulnerability.” Led by heavy borrowing among businesses in China and Brazil, emerging market debt has soared from 50 per cent to 75 per cent of GDP since 2008, as capital has fled advanced countries where safe returns have been crushed by quantitative easing and ultra-low official interest rates. “Policy missteps or adverse shocks could result … in prolonged global market turmoil that would ultimately stall economic recovery,” said Jose Vinals, the IMF’s top financial counsellor. Start of sidebar. Skip to end of sidebar. End of sidebar. Return to start of sidebar. He suggested up to $US3 trillion was “over-borrowing” and a rising share had occurred in foreign currencies. The IMF’s warnings are expected to be seized upon by business as underscoring the importance of the Trans-Pacific Partnership, the trade and investment deal agreed to this week among 12 nations, including Japan, the US and Australia. The regional trade accord is widely seen as a major catalyst for greater and more stable growth as well as aligning Australia to advanced economies as Asia shows signs of stress. A worldwide sell-off in bond, equity and currency markets throughout the past two months might be a taste of the turbulence yet to come, the IMF’s Mr Vinals said, and a “disorderly” return to more normal pricing for riskier assets could cause “a vicious cycle of fire sales, redemptions and more volatility”. While Asia’s economic fundamentals are more robust than the late 1990s when a currency crisis swept the region, analysts have warned that a period of lacklustre growth is looming. “Consumption and investment have been largely driven by credit since the global financial crisis. As debt now gets squeezed, local demand inevitably takes a toll,” said HSBC’s co-head of Asian economic research Frederic Neumann. Even so, the Reserve Bank of Australia yesterday sounded a more optimistic tone and played down the risks of ultra-low interest rates across the world. “While it never pays to be complacent, there are few early-warning indicators for a financial crisis, despite the prevalence of low nominal interest rates,” said John Simon, the Reserve Bank’s head of research, in a speech in Sydney. “Rather, inappropriately low interest rates — that is, low interest rates during times of strong economic growth — combined with inadequate prudential supervision can contribute to a build-up of risk that is ultimately destabilising,” he said. Mr Simon suggested that credit growth was a better warning sign of system malfunctioning. “Credit tends to reflect a combination of the relative speed of growth, the tightness of prudential controls and the tightness of monetary policy, while interest rates alone do a poor job,” he said. Emerging market private debt levels are still lower than in developed countries. Australia’s corporate debt ratio is 80 per cent compared with an average for wealthy countries of 121 per cent. The US has a corporate debt ratio of 70 per cent. The IMF is worried that the end of the US’s nine-year zero interest rate policy, expected within months as its economic growth picks up, will spark the beginning of a repatriation of funds to the US, causing a spike in emerging market borrowing costs. “China in particular faces a delicate balance of transitioning to more consumption-driven growth without activity slowing too much, while reducing financial vulnerabilities and moving towards a more market-based system,” the IMF said. It noted that about a quarter of Chinese corporate debt was of doubtful quality. The Washington-based organisation, which gave the global financial system repeated bills of good health before 2008, downgraded its outlook for global economic growth earlier this week to 3.1 per cent for this year and 3.6 per cent in 2016, following a similar change by the World Bank. But the fund said output could be as much as 2.4 per cent lower by 2017 if an “adverse” scenario or heightened risk aversion arose. Since the GFC and the slowdown in advanced countries, developing nations have contributed more than half of global growth. The IMF also homed in on sluggish European growth and bank fragility. “The global financial outlook is clouded by a triad of policy challenges: emerging market vulnerabilities, legacy issues from the crisis in advanced economies, and weak systemic market liquidity,” it said. Additional reporting: The Wall Street Journal |
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