The Music Goes on and on

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Ben Bernanke: ‘Lack of stimulus to blame for rates’
THE AUSTRALIAN MAY 29, 2015 12:00AM

Adam Creighton

Economics Correspondent
Sydney

The most influential central banker in a generation, who guided the global economy through the biggest financial crisis since the Great Depression, has pinned the blame on governments for the ultra-low interest rates that are playing havoc with exchange rates, asset prices and incomes around the world.

In sweeping and optimistic ­remarks about the economy, made in Sydney yesterday, former US Federal Reserve chairman Ben Bernanke said central banks had been compelled to slash interest rate to unprecedented low levels because governments had dragged their feet in providing essenti­al stimulus measures.

“One of the problems in the US and elsewhere is everyone complains about low interest rates and quantitative easing but no one else does anything, so everything gets dumped on the central bank,” he said, hoping for an era when central banking would once again be “boring”.

“I want to be very clear: it would be much better if we had a more balanced monetary and ­fiscal mix to support the recovery. That would allow the same growth and (perhaps) with higher interest rates.”

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MOREShock forecast threatens budget
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International Monetary Fund data shows the seven largest advanced economies have cut their combined deficit from 10.3 per cent of GDP in 2009 to a forecast 3.8 per cent this year. The Abbott government has controversially distanced itself from the “austerity” policies being pursued in Europe, using its second budget to stimulate small business ­investment while pushing out the scheduled return to surplus until after 2020 at the earliest.

While steering clear of offering any advice on Australia’s budget position, Dr Bernanke said that, after the $US700 billion stimulus program in the US in 2009, “fiscal policy has been very contractionary”.

Dr Bernanke, who served as US Federal Reserve chairman from 2006 until last year and is now a fellow at the eminent Brookings Institute, dismissed fears of a beggar-thy-neighbour global “currency war” and ­encouraged countries to pursue their interest rate policy independently of currency movements to maximise their economic growth.

“If Australia finds that because of the strong Australian dollar that it has high unemployment, then it would have to respond and it would either increase domestic demand or weaken its own currency,” he said at the World Business Forum at Star casino.

Dr Bernanke’s remarks come weeks after the Reserve Bank, which has expressed concern about the high dollar, cut official interest rates this month to an unprecedented low of 2 per cent, fuelling fears of excessive household debt accumulation and unsustainable house price growth in Sydney and Melbourne.

He applauded the efforts of Australia and other nations to put specific controls on lending to mitigate excessive house price ­increases. “Australia, UK and other Commonwealth countries are being … good at using various kinds of prudential policies to addres­s concerns about housing prices — that’s the better ­approach,” he said, referring to the Australian banking regulators’ emerging 10 per cent growth cap on investor housing loans.

Dr Bernanke strenuously defended his policy record and role as global “money printer” in chief, policies that have seen the balance sheets of central banks in the US, Japan and Europ­e quadruple since 2007 to almost $US12 trillion ($15.5 trillion).

“When we began quantitative easing in 2008, and people were saying there would be hyperinflation, this was totally uninformed viewpoint: there was never any risk of that,” he said. The countries that had pursued such policies most aggressively — the US and Britain — were exper­iencing the quickest recoveries.

“We didn’t print any money; the amount of money in circul­ation (stayed) more or less what it was with a trend,” he said, explaining­ that the US Federal Reserve bought bonds by creat­ing “reserves” that never became cash.

Dr Bernanke saw a decline in financial liquidity, particularly in global bond markets, as a source of potential financial risks but was positive about the overall system, arguing that markets could withstand a stockmarket crash of 15 per cent.

“The financial system is much more stable than it was; supervision and oversight is better,” he said, nevertheless suggesting authorities be “very attentive” to potential unintended side effects of the global search for yield.

He was sanguine about the economic prospects of the US and China.

“Some slowing in China is both inevitable and probably ­desirable … (but) a hard landing is not a high probability at all,” he said, arguing that its economic model, which has powered Australian iron ore exports for a decade, would need to shift from a reliance on heavy industry and construction to consumption.

“It’s not great-guns kind of growth but we are in the middle of a growth period,” he said, citing improving confidence and falling unemployment in US.

The biggest risks to the global economy were geopolitical, he said, singling out the Middle East. Looking further ahead, Dr Bernanke said he did not share other economists’ pessimism about productivity growth, arguing that the existing productivity statistics were not accurately reflecti­ng the real gains made.

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http://www.cnbc.com/id/102722850

A 45-year chart shows stocks not overvalued: Economist
Lawrence Lewitinn | @lvlewitinn
6 Hours Ago
CNBC.com


With stocks near record highs, many are starting to worry that valuations have gotten too rich for the market's own good. But one influential economist is saying investors need not worry, and he has a 45-year chart to prove his point.

The S&P 500 is now trading at the highest price-to-earnings (P/E) multiple that stocks have seen in a decade, roughly 22 times its last 12 month's earnings, according to data compiled by S&P Capital IQ.

However, according to economist Alan Reynolds, senior fellow at the Cato Institute, the market shouldn't be looking at P/E in a vacuum. Instead, he maintains the key indicator is earnings yield—the inverse of the P/E ratio—and how it moves with interest rates.

"It makes no sense to say that stock prices are too high unless you also say that bond prices are too high," said Reynolds, who was part of President Reagan's OMB transition team in 1981. "I think bond prices are too high but so does the stock market."

Reynolds has graphed the S&P 500's earnings yield against the benchmark U.S. 10-year Treasury note going all the way back to 1970. He found that earnings yields track quite closely with bond yields. And since yields move in the opposite direction of price, the prices of both stocks and bonds have risen steadily over the past few years.


"If anything, the E/P tells you something about bonds rather than the other way around," said Reynolds. "It tends to lead."

He says that S&P 500's earnings yield and the U.S. 10-year bond yield have both averaged about 6.7 percent in the past 45 years. With U.S. 10-year yields at a relatively low 2.15 percent, Reynolds holds that the market's P/E ratio to be higher than average.

"To say that the P/E ratio today is unusually high—meaning the E/P ratio is unusually low—is simply to say bond yields aren't 6.7" percent, said Reynolds. "At 2.1, we would expect the P/E ratio to be much higher than it is."

Since there's still a gap of a couple of percentage points between the 10-year bond yield and the S&P 500's earnings yield of 4.5 percent, Reynolds said that stocks are indicating bond yields are too low. Therefore, he isn't concerned about an expected Fed hike coming so much as he is about earnings.

"I think it's overdue," he said of a rate increase. "I don't think that's what we worry about so much as 'E' in the P/E ratio. If something bad happens to earnings, all bets are off."

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The death knell of the market economy
BUSINESS SPECTATOR JUNE 05, 2015 8:30AM

Robert Gottliebsen

Business Spectator Columnist
Melbourne
As we reach crunch time with Greece, sharemarkets are again becoming nervous. But whereas a year ago we would be looking at a major crisis, now even if Greece falls over and exits the euro, the damage can be contained.

And behind that outcome is a big change in the way capitalism is now being managed in Europe, the US, Australia, Japan and most developed countries. In essence governments, central banks and regulators are becoming much more involved in the capital system in the wake of the global financial crisis.

In the 1980s, 1990s and the 2000s I regularly attended the World Economic Forum in Davos and at almost every meeting there was one consistent theme: that the market economy was the way to national success and prosperity.

Country after country extolled the virtues of allowing markets to prosper and curbing regulation. Clearly linked to the prosperity created by the market-dominated economy was democracy, which was seen as closely tied to this market system.

The global financial crisis has changed that game. At the ADC Leadership Retreat at Hayman Island the chairman of the Institute for New Economic Thinking, Anatole Kaletsky, pointed out that communities are now modifying the market economy with much greater government involvement in matters like finance/banking, energy generation and the environment. What is happening in Greece and Europe is part of a world trend.

Large parts of the world now believe that on its own the market economy does not work and this new thinking will cause many strategies to be modified.

And so before the global financial crisis the Chinese were very reluctantly beginning to agree that they would have to move much closer to the American system of market economy and democracy. But now they believe that the Chinese way is superior or at least equal to the American market/democratic system. There is no inevitability about democracy.

And Russia is coming to a similar conclusion. Australia, as a leading democracy in our region, may find itself surrounded by countries using very different political systems with varying degrees of government intervention in their economies. The model that is emerging out of the global financial crisis is actually closer to the European model rather than the old American-market driven model of the previous half century.

Anatole Kaletsky also believes that the world has underestimated the power of the European version of quantitative easing. As a result the recovery of the European economies may be greater than the generally accepted view.

Europe is buying back a much bigger percentage of its bonds than either the US or Japan in their QE programs so the liquidity injection is much greater and at a higher level. Kaletsky says that the bond buyback is one reason why Europe is not nearly as vulnerable to Greece as it was, say, a year ago.

The Greeks can take an agreement that offers, what they see, is another dose of austerity. But the compromise is that it probably won’t be policed. Alternatively, the Greeks can go it alone and suffer disastrous economic consequences. In effect, they’ve lost bargaining power.

The message from Kaletsky is that two years ago Greece had enormous power because if it collapsed and left the euro the spillover would have broken Spain, Portugal and Italy via a rush on its bonds and banks. Now it can be contained and the suffering of Greece will be a spur to keep wayward countries in the tent.

The danger for Europe is that Greece on its knees will link with a foreign power (Russia or China) and give one of them much greater clout in Europe.

Business Spectator

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The liquidity time bomb
Nouriel Roubini

865 words
3 Jun 2015
TODAY (Singapore)
TDAYSG
English
© 2015. MediaCorp Press Ltd.

A paradox has emerged in the financial markets of the advanced economies since the 2008 global financial crisis. Unconventional monetary policies have created a massive overhang of liquidity. But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity.

Policy interest rates are near zero (and sometimes below it) in most advanced economies, and the monetary base (money created by central banks in the form of cash and liquid commercial-bank reserves) has soared – doubling, tripling, and, in the United States, quadrupling relative to the pre-crisis period. This has kept short- and long-term interest rates low (and even negative in some cases, such as Europe and Japan), reduced the volatility of bond markets, and lifted many asset prices (including equities, real estate, and fixed-income private- and public-sector bonds).

Yet, investors have reason to be concerned. Their fears started with the “flash crash” of May 2010, when, in a matter of 30 minutes, major US stock indices fell by almost 10 per cent, before recovering rapidly.

Then came the “taper tantrum” in the spring of 2013, when US long-term interest rates shot up by 100 basis points after then-Fed chairman Ben Bernanke hinted at an end to the Fed’s monthly purchases of long-term securities.

Likewise, in October last year, US Treasury yields plummeted by almost 40 basis points in minutes, which statisticians argue should occur only once in three billion years. The latest episode came just last month, when, in the space of a few days, 10-year German bond yields went from five basis points to almost 80.

These events have fuelled fears that, even very deep and liquid markets — such as US stocks and government bonds in the US and Germany — may not be liquid enough. So, what accounts for the combination of macro liquidity and market illiquidity?

For starters, in equity markets, high-frequency traders (HFTs), who use algorithmic computer programs to follow market trends, account for a larger share of transactions. This creates, no surprise, herding behaviour.

Indeed, trading in the US nowadays is concentrated at the beginning and the last hour of the trading day, when HFTs are most active. For the rest of the day, markets are illiquid, with few transactions.

A second cause lies in the fact that fixed-income assets — such as government, corporate and emerging-market bonds — are not traded in more liquid exchanges, as stocks are. Instead, they are traded mostly over the counter in illiquid markets.

Third, not only is fixed income more illiquid, but now most of these instruments — which have grown enormously in number, owing to the mushrooming issuance of private and public debts before and after the financial crisis — are held in open-ended funds that allow investors to exit overnight.

Imagine a bank that invests in illiquid assets but allows depositors to redeem their cash overnight: If a run on these funds occurs, the need to sell the illiquid assets can push their price very low very fast, in what is effectively a fire sale.

Fourth, before the 2008 crisis, banks were market makers in fixed-income instruments. They held large inventories of these assets, thus providing liquidity and smoothing excess price volatility. But, with new regulations punishing such trading (via higher capital charges), banks and other financial institutions have reduced their market-making activity. So, in times of surprise that move bond prices and yields, the banks are not present to act as stabilisers.

In short, although central banks’ creation of macro liquidity may keep bond yields low and reduce volatility, it has also led to crowded trades (herding on market trends, exacerbated by HFTs) and more investment in illiquid bond funds, while tighter regulation means that market makers are missing in action.

As a result, when surprises occur — for example, the Fed signals an earlier-than-expected exit from zero interest rates, oil prices spike, or eurozone growth starts to pick up — the re-rating of stocks and especially bonds can be abrupt and dramatic: Everyone caught in the same crowded trades needs to get out fast. Herding in the opposite direction occurs, but, because many investments are in illiquid funds and the traditional market makers who smoothed volatility are nowhere to be found, the sellers are forced into fire sales.

This combination of macro liquidity and market illiquidity is a time bomb.

So far, it has led only to volatile flash crashes and sudden changes in bond yields and stock prices. But, over time, the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets. As more investors pile into overvalued, increasingly illiquid assets — such as bonds — the risk of a long-term crash increases.

This is the paradoxical result of the policy response to the financial crisis. Macro liquidity is feeding booms and bubbles; but market illiquidity will eventually trigger a bust and collapse. PROJECT SYNDICATE

ABOUT THE AUTHOR:

Nouriel Roubini is chairman of Roubini Global Economics and professor of economics at Stern School of Business at New York University.


MediaCorp Press Ltd

Document TDAYSG0020150602eb6300005

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The low-yield world is not ending any time soon
Maximilian Walsh
989 words
2 Jul 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

Monetary policy Low interest rates don't just reflect low global growth - they are helping to keep it that way.

Why are interest rates so low? And how long will they stay that way?

The Bank of International Settlements (BIS) notes in its annual report released this week: "Interest rates have never been so low for so long. Between December 2014 and end-May 2015, on average around $US2 trillion ($2.6 trillion) in global, long-term sovereign debt, much of it issued by euro area sovereigns, was trading at negative yields. At their trough, French, German and Swiss yields were negative out to a respective five, nine and 15-year yields."

The yields nominated above are unprecedented and disconcerting. Arguably, that has already happened. Current low yields are indicative of a much broader malaise than that which has struck Greece.

The BIS report suggests that, without a major overhaul of global monetary practices, the current malaise is likely to deteriorate further and could result in the impoverishment of many who have assiduously saved to finance a comfortable retirement. Emerging market economies (EME) that have borrowed heavily in US dollar-denominated loans are seen as particularly vulnerable.

Do not take comfort if you have no direct exposure to the emerging markets, because the EMEs' heft in the global economy has soared since the Asian crisis, from about one-third to almost half of global GDP in purchasing power terms. China is a case in point. At the end of 2014, it was the world's eighth-largest borrower of the $US1 trillion in cross-border bank claims, double the amount outstanding just two years before.

Greece looks to be a prospective case study of the social, political and financial implications of a mismanaged monetary and financial system.

It is the contention of the BIS that the malaise that has enfeebled financial systems reflects the failure to come to grips with slower-moving financial booms and busts that leave deep and enduring scars. This runs the risk of entrenching instability and chronic weakness. Domestic policy regimes have been too narrowly concerned with stabilising short-term output and inflation.

The BIS sees the domestic preoccupation of central banks with inflation as the explanation for persistently low-interest rates.

An economy's interest rate structure is effectively built on the short-term policy floor set by the central bank. In addition, central banks have influence on the long term through signals about how they will set short-term rates and, increasingly, through large-scale purchases along the maturity spectrum.

Market participants set deposit and loan rates and through their portfolio choices help determine long-term market rates. Market participants address many factors as to where the longer-term rate should sit. Not surprisingly, expectations of what the central bank will do rank highly among the factors taken into account.

The BIS report describes the conventional process of the interest rate determination and then poses and answers its own question: "Are the interest rates that prevail in the market actually equilibrium rates? Take first the short-term rate, which central bankers set.

"When we read that central banks can have only a transitory impact on inflation-adjusted short-term rates, what is really meant is that, at some point, unless central banks set them at their 'equilibrium' level, or sufficiently close to it, something 'bad' will happen.

"Exactly what that 'bad' outcome is will depend on one's view of how the economy works. In the prevailing view - one embedded in the popular 'savings glut' and 'secular stagnation' hypothesis - the answer is that inflation will either rise or fall, possibly into deflation.

"Inflation provides the key signal and, its behaviour depends on the degree of economic slack."

But slack is difficult to measure in practice. It is subordinate to inflation. It is the BIS contention that: "The very low interest rates that have prevailed for so long may not be the 'equilibrium' ones, which would be conducive to sustainable and balanced global expansion.

"Rather than just reflecting the current weaknesses, low rates may in part have contributed to it by fuelling costly booms and busts."

The BIS report points out that financial bubbles and busts tend to be both larger in scale and longer in duration than other similar episodes. This elasticity of finance results in too much debt, too little growth and excessively low interest rates.

"In short, low rates beget lower rates," the BIS says.

In that summary is the answer to the second question: How long will interest rates stay low?

The answer: Until we stop using inflation as the keystone of the monetary system.

But that's really only a small part of the answer.

The fuller version goes this way: "The right response is hard to implement. The policy mix will be country-specific, but its general features are not. What is required is a triple rebalancing in national and international policy frameworks; away from illusory short-term macroeconomic fine-tuning towards medium-term strategies; away from overwhelming attention to near-term output and inflation towards a more systematic response to slower-moving financial cycles; and away from a narrow-own-house-in-order doctrine to one that recognises the costly interplay of domestic-focused policies.

"In this rebalancing, one essential element will be to rely less on demand management policies and more on structural ones."

The chances of even a modest degree of success in having such a reform program implemented are currently zilch. A few more crises and perhaps a Greece or two could have a galvanising impact. After all, there was a time, now so long ago, when the US financial stability system was run on the basis of the money supply.

Maximilian Walsh is deputy chairman of Dixon Advisory and a former editor and managing editor of The Australian Financial Review.


Fairfax Media Management Pty Limited

Document AFNR000020150701eb720002a

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Jul 10 2015 at 12:04 PM Updated Jul 10 2015 at 2:13 PM

China or Greece: Which is scarier?

by John Kehoe
Stephen Roach, the former chairman of Morgan Stanley Asia, admits the China stock market crash is a "serious event".

Yet for the world economy and even China's economic wellbeing, Roach believes, perhaps surprisingly, the near-40 per cent plunge in the Shanghai equities index is probably not such a big deal. After all, the market was over-valued after doubling in the previous 12 months.

"What we've learned about the confluence of the economy and markets over the last seven years is they really don't connect," Roach says.

"China was the worst performing major equity market in the world for six years when the economy was booming. The market exploded to the upside in the past year when the economy is slowing."

Traders work at computer screens at the Frankfurt Stock Exchange. Both Greece and China are on their minds.
Traders work at computer screens at the Frankfurt Stock Exchange. Both Greece and China are on their minds. Bloomberg
"If you are looking for the market to give you a take on the economy, you are probably looking at the wrong place."

Indeed, International Monetary Fund chief economist Olivier Blanchard on Thursday described the Chinese stock market as a "casino" that was largely disconnected from the economy.

This may explain why Roach is instead looking with more trepidation at Greece's debt crisis.

Greece only makes up about 2 per cent of Europe's GDP and its economy is about the size of the state of Victoria's.

Yet Roach, now a senior fellow at Yale University, heard similar reassurances before other unforeseen market meltdowns.

"What makes me nervous is the conviction that there can't be contagion," says Roach.

"This is exactly the same story we heard as the dotcom bubble and [US] subprime mortgage market was bursting."

Most pundits have been more concerned about China than Athens' stand-off with European creditors, since the Shanghai stock market hit turbulence this month. It is an unusual situation when top market watchers are arguing about which of two huge economies, the European Union and China, poses a greater threat for investors.

GLOBAL MARKETS ON EDGE

Entering the weekend, global markets remained on edge. A possible Greek sovereign debt default and Grexit will come to a head at crucial summit with European creditors.

BlackRock's chief investment strategist in New York, Russ Koesterich, says that even under the worst-case scenario, Europe and the world economy can survive Grexit.

"But similar to the story about China, if we do wake up Monday and it looks like a deal is out of reach, there is going to be a knee-jerk reaction," Koesterich told CNBC this week.

"I'd watch the bond yields in Portugal, Spain and Italy as a key indicator."

Struggling southern European economies have in the past flirted with exiting the euro to wipe out their debts and to devalue their currencies to become more competitive. So cutting Greece loose raises the possibility of contagion spreading to other struggling southern European economies.

"If there is a Greek exit, can the ECB [European Central Bank] contain the contagion to other peripheral European countries?" Koesterich asks.

Once again, seven years after the global financial crisis led central bankers to unleash their fire hoses and make unprecedented interventions in markets, there is an addiction to liquidity from policymakers.

Many in the market are betting the ECB would come to the rescue by ramping up its €60 billion-a-month money-printing program. ECB president Mario Draghi has been in the thick of the negotiations between Merkel and Tsipras.

In a similar vein, the US Federal Reserve is under pressure from the IMF to keep interest rates around zero until next year. The fund this week lowered its global growth forecast to 3.3 per cent – the weakest since the world economy shrank in the financial crisis in 2009.

The reliance on authorities to boost growth and solve the market's problems are even more pervasive in China, where policymakers' credibility has taken a severe hit in recent weeks.

"I think it is where faith in policymakers could take a big hit," says J2Z Advisory principal Jay Pelosky.

The loss of stockmarket investor confidence raises questions about the ability of Chinese authorities to carry through their challenging economic transformation and plans to liberalise their financial markets.

The Chinese masses piling into shares via risky margin loans has been well documented. Yet amid this maelstrom, it should not be forgotten that only 10-15 per cent of Chinese households own stocks, compared to 38 per cent of Australians and about 50 per cent of Americans. The bulk of China's stockmarket is controlled by the rich.

"It affects the wealthy, but not regular Chinese citizens so much," says Sean Miner, the China program manager at the Peterson Institute for International Economics in Washington. He previously lived in Beijing for three years.

UNKNOWN FACTOR

However, the unknown factor is the impact of falling share prices on investment by businesses and state-owned enterprises, which makes up 48 per cent of the country's GDP. "It may affect companies' ability to borrow and some firms may start to pare back purchases of land or equipment," Mr Miner said.

Pelosky says Chinese companies have issued well over $US100 billion in equity this year to hungry investors to pay down expensive corporate debt. The debt-for-equity swap that China's equity bull market allowed "is no longer feasible and makes it harder for China to help its highly indebted companies," Pelosky says.

But most close observers believe the bear market will not spread violently.

US Treasury Secretary Jack Lew says China's stock markets are separated from the world economy and financial system. But the recent instability does raise longer term issues. "How do Chinese policymakers respond to this and what does it mean in terms of the core condition of the economy?"

The answer is of great importance to Australia, a huge commodity exporter to China. As BHP Billiton's chief commercial officer Dean Dalla Valle said in Washington on Wednesday, China is trying to rebalance from an over reliance on investment and manufacturing exports to be more driven by domestic consumption.

Back in the US, the turmoil overseas and softness in the domestic economy, are giving the Fed consternation about its plan to raise interest rates for the first time in a decade. Minutes released this week from the Fed's June 16-17 meeting, before the worst of the overseas turbulence struck, noted "uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging market economies."

Capital Economics chief US economist Paul Ashworth says those "concerns will undoubtedly have grown in the past few weeks".

The Fed's mandate is the US domestic economy, so the chaos abroad should only influence its actions if external events spill into the US.

RAISING RATES

But Fed watchers believe offshore events, at least at the margin, could be the latest excuse for the Fed to delay its plan to raise rates in September or December.

"If they're on the fence, you could argue it could delay the onset of Fed normalisation," says Roach, who served on the research staff of Fed.

The Washington-based IMF this week ramped up pressure on the Fed to defer raising rates, warning that economic growth could be "significantly debilitated" by a soaring American dollar.

"Should the Fed raise rates the risk of a policy mistake is higher given rest of world is weaker," Pelosky says.

Amid the uncertainty in Europe and China and crashing commodity prices, global capital is flowing into safe haven US-dollar assets like Treasury bonds, sending the greenback to around decade highs versus the euro and Japanese yen. At home, the Australian currency dipped below US74¢ for the first time in six years this week.

At Martin Place, Reserve Bank of Australia governor Glenn Stevens has been eager to see the Fed raise rates to help lower the Australian dollar. But like the rest of the world, he will surely be paying close attention to events in China and Greece.

Even if the financial market ructions are largely immaterial for the longer term health of the world economy, investors may still respond emotionally to surprises in the near term.

"If we have an environment that is risk-off sentiment because of the Chinese stock market and issues in Greece, it's unrealistic to believe it won't affect investor behaviour," Koesterich says.

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Greek, Chinese crises are far from over
TERRY MCCRANN THE AUSTRALIAN JULY 18, 2015 12:00AM

One, if you’ll pardon the all-too grimly appropriate word, down; one to go.

I doubt that anyone would even try to claim that ‘‘Greece has been saved’’ as a consequence of the tortuous — torturing? — deal which was finally agreed towards breakfast on Monday morning in Europe.

Saved certainly, from a catastrophic financial implosion, with or without a ‘‘Grexit’’. But condemned to further austerity without exit as the price of that salvation.

What’s either less bad or not particularly good for Greece was, though, clearly good for Europe. Whether we mean the grandly named if grubbily advanced European Project, the eurozone and so the euro more narrowly, or for Germany at its narrowest.

Certainly, so far as the rest of the world is concerned, it takes Greece and its daily potential to roil global financial markets, rationally or otherwise, off the front page.

At least, that is, until we, Europe and Greece, all return at some inevitable future date to the position ex ante. That is to say, to the crisis as it was before the deal.

As nothing substantive has been solved — not just about Greece, but also in terms of the inherent contradictions embedded in the euro — we will be back to all this again. And almost certainly we will be back to this in less, perhaps considerably less, benign circumstances.

In all the analysis of, claim and counterclaim about the deal, it’s not been recognised how lucky ‘‘we’ve’’ been — the world, Europe and even the Greeks — in terms of the relatively benign environment in which the crisis had to be addressed.

That is to say, at a time of all-but global zero short-term interest rates, financial markets awash with liquidity as a consequence of the massive central bank money-printing, global equity markets at record highs and relatively buoyant economic activity.

This benign backdrop was captured in the Greek 10-year bond yield. At the peak of the crisis it barely nudged 19 per cent and it’s now back to just 11.6 per cent.

I say ‘‘just’’ because it makes no sense. The country is broke. It has a debt-to-GDP ratio of 170 per cent, heading for 200 per cent. At some point, it will default on that debt. And yet ‘‘the market’’ is prepared to lock-in money for 10 years at just 11 or so per cent.

I’d suggest this is less a comment on the probability of repayment, and more on the alternative 10-year yields, grading down to less than 1 per cent on German bunds.

In any event, contemplate the potential for the next — the continuing? — Greek crisis having to be addressed in less favourable circumstances. Like for instance, a week after the collapse of a Lehman Brothers.

It’s an interesting comment on our age, that we have a Germany which is applying the principles of manana to address a banana republic situation.

But that is for, well, the day after tomorrow. It is China which now comes into focus ‘‘tomorrow”.

Again, this was the week that ‘‘China’’ also seemed to be ‘‘solved’’. The ‘‘innovative’’ measures adopted by the Chinese government seemed to work to stop the plunge in the country’s casino — sorry, share — markets.

You suspend half the companies and threaten to, at this stage only metaphorically, shoot sellers, and the result is quite remarkably positive.

But there are three big points to be made.

Obviously this is as much a ‘‘solution’’ as the Greek one. We — China and the world — will also be back inevitably to a position ex ante at some point in the future. Perhaps sooner than we think; in comparative terms, the ‘‘Greek solution’’ probably has a longer half-life than the China one.

Secondly, solved or merely temporarily frozen, the events in Chinese financial markets will spill into the global marketplace.

While it can be argued that there are limited interfaces between the sharemarket and the Chinese real economy, there are clearly major real-time interfaces between the Chinese domestic share and property markets, and also critically into global property markets.

The flow of Chinese money into global property markets, which has been magnified in its impact on the relatively limited Sydney and Melbourne markets, is driven by the same search for yield as more traditional investment money.

It also has a second, somewhat unique motivator — getting money out of China. This motivator will have been ‘‘strengthened’’ by the government’s order to the sharemarket not to fall.

The recent fall in the Aussie dollar makes us an even more attractive destination, coming on top of the 20 per cent or so fall over the last year against the three currencies that matter: the Chinese yuan, the Hong Kong dollar and the US dollar.

In short and in sum, there will be consequences of the events in and around the Chinese markets. They could be large; they will be variable and unpredictable.

The third point to make about the Middle Kingdom is that we still don’t know how the real economy is travelling right now, and far less at what pace it will be growing through 2016 and beyond.

The Chinese economy is stepping down to a new growth path of 6-7 per cent or something lower — not necessarily to our advantage.

We are going to find out in the next year or so.

Assuming that Greece and China ‘‘hold’’ the US Fed will start to lift its official rate from mid-September. Our Reserve Bank will not cut again in August.

[Boon]

Cheap Money Is Here to Stay

15 JUL 23, 2015 6:00 PM EDT
By William Pesek

For decades, central banks lorded over markets. Traders quivered at the omnipotence of monetary authorities -- their every move, utterance and wink a reason to scurry for safe havens or an opportunity to score huge profits. Now, though, markets are the ones doing the bullying.

Take New Zealand and Australia. Yesterday, the Reserve Bank of New Zealand slashed borrowing costs for the second time in six weeks even as housing prices continue to skyrocket. A day earlier, its counterpart across the Tasman Sea (already wrestling with an even bigger property bubble of its own) said a third cut this year is "on the table."

Just one year ago, it seemed unthinkable that officials in Wellington and Sydney, more typically known for their hawkishness and stubborn independence, would join the global race toward zero. But with commodity prices sliding, China slowing and governments reluctant to adopt bold reforms, jittery markets are demanding ever-bigger gestures from central banks. Even those presiding over stable growth feel the need to placate hedge funds, lest asset markets falter. When this dynamic overtakes countries such as New Zealand (growing 2.6 percent) and Australia (2.3 percent), it's hard not to conclude that ultralow rates will be the global norm for a long, long time.

Indeed, the major monetary powers that are easing -- Europe, Japan, Australia and New Zealand -- have all suggested rates may stay low almost indefinitely. Those angling to return to normalcy, meanwhile -- the Federal Reserve and Bank of England -- are pledging to move very slowly. Even nations with rising inflation problems, like India, are hinting at more stimulus.

"As interest rates continue to fall across most of the globe, central banks are also united in their main message: Once rates have come down, they're likely to stay down," says Simon Grose-Hodge of LGT Bank. "And when they finally do tighten, the 'normal' rate is going to be a lot lower than it used to be."

Could the People's Bank of China be next? "With underlying GDP growth still looking weak, more monetary policy moves are likely," says Adam Slater of Oxford Economics. "And China may even face the prospect of short-term rates dropping towards the zero lower bound."

In April 2013, International Monetary Fund head Christine Lagarde asked her staff to study how markets might react to major central banks reversing their easing policies. Yet Japan's experience illustrates just how hard it is to restore normalcy after a huge economic shock. Markets, businesses, banks, consumers and politicians alike quickly learn not just to love free money, but to rely on it. Zero rates are about the only thing keeping Japan's huge debt load sustainable, thus making it all but impossible for Bank of Japan Governor Haruhiko Kuroda to taper.

Even if Fed Chair Janet Yellen manages to pull off a rate hike or two later this year, she'll be hard-pressed to return to the monetary-policy framework that prevailed before the Lehman Brothers crisis. Yellen would be pilloried by Wall Street and summoned to Capitol Hill for a browbeating if she tried. Similarly, European Central Bank President Mario Draghi would face rebellions across the euro zone to any tapering moves.

At this point, rather than pretend they can return to normalcy, central banks should be devising ways to adapt to a low-rate world. Surely, they should prod governments to do their part to boost growth and upgrade economies. But monetary authorities also must make sure the liquidity they churn out doesn't increase financial risks.

In New Zealand, for example, central bank Governor Graeme Wheeler has been experimenting with so-called macroprudential steps to tame asset bubbles, including limits on leveraged lending. Australia should be eyeing new regulations and taxes to make sure its record-low 2 percent benchmark rate doesn't add froth to property markets. That goes, too, for officials in the U.S., Europe and elsewhere still thinking they can regain their power over markets or the business cycle. Those days aren't going to return anytime soon.

http://www.bloombergview.com/articles/20...re-to-stay

[greengiraffe]

Jul 24 2015 at 4:00 PM Updated Jul 24 2015 at 4:15 PM
Volatility index offers share investors false sense of calm

Market watchers warn of a dangerous sense of investor complacency in markets.


by Philip Baker
One of the features of the past few years has been the lack of volatility in the sharemarket. Even now the Chicago Board Options Exchange's VIX Index – otherwise known as the "fear index" – is still close to its record low for the calendar year reached just a week ago. According to some traders, that's good news for the sharemarket.

The theory goes that the world did not fall apart as the market had thought – despite the ructions in Greece, Iran, the Chinese sharemarket and some mixed news from the US reporting season.

The optimists say that implies the sharemarket can keep rising.

The VIX is currently hovering around 12.25 points after it reached the year-to-date low of 11.95 a week ago.

Perpetual's Matthew Sherwood thinks investors should be worried.
Perpetual's Matthew Sherwood thinks investors should be worried. Louise Kennerley
Indeed, over the past 10 years the average for the VIX has been closer to 20 index points. So at around 12, it does imply no one is too worried about anything.

By contrast, when the global financial crisis was swirling in 2008, the index got to 80 points. And in 2010 and 2011 when the Greek exit issue first hit the headlines, the index also rose to around 40 points.

The low point was in early 2007 when it fell to 9.9 points.

So at its current level, it is unusually low given all the negative news.

DOUBLE-DIGIT GROWTH DEFIES TWO-PRONGED THREAT

It comes as Australian super funds have reported double-digit profit growth for the third consecutive year, defying the unusual two-pronged threat of a slowing global economy and the likelihood of higher interest rates in the United States.

So should investors be worried about all this complacency? Matthew Sherwood from Perpetual thinks so.

"Overall, there is a dangerous sense of complacency in markets, with investors seemingly happy to overlook risks in the wake of the policy changes in Europe. But in the end, Grexit risks are delayed not resolved," he says.

He expects Greece will exit the eurozone in the next one to three years but thinks a regional recession is a low likelihood thanks to action taken by the European Central Bank.

But he sees two other risks – China with its high debt and the US Federal Reserve raising rates after keeping them at close to zero for seven years.

Sherwood has looked back to 1958 and the 10 tightening cycles that have taken place since then.

It's not all bad news.

ASX BEATS WALL STREET ON 9 FROM 10 CYCLES

The local sharemarket has done better than Wall Street on nine of those tightening periods and by an average of 18 per cent in the two years after the rate hikes started.

It makes sense that the smaller the rate rise, the better the performance is for US shares on a comparative and outright basis.

So how high will rates in the US go?

Since 1957 the average rate hike over the cycle by the Fed on those 10 occasions has been 4.9 per cent.

But if rates went anywhere near that, the economy and Wall Street would not cope well at all.

Sherwood thinks the Federal funds rate will top out at 2 per cent sometime late in 2017, implying the hikes from near zero will be very slow.

Indeed, he thinks the move in the US dollar over the past 12 months has already been the same as three hikes of one-quarter of a percentage point each.

FIRST HIKE THE CONCERN

Still, it's that first hike that can cause all the problems. In 1994 and 2004 the first rate rise led to a sell-off on Wall Street of about 8 per cent to 9 per cent, just shy of a technical correction.

It's one reason why the Fed is making it such a slow, drawn-out process.

The problem for investors is that although the US sharemarket and US economy (and our sharemarket) might cope reasonably well with rate hikes in the end, the global spillover is what could cause all the problems.

Emerging markets, with all their debt, might not handle the rate hikes so well, even if they top out at 2 per cent.

Since the GFC, leverage around the world has been rising, with the average global debt increasing by 40 per cent of GDP, according to Perpetual. The main borrowers have been in Asia and Europe.

Sherwood says the best way to survive the rate hikes in the US is to gain some exposure to Japan and, to a lesser extent, Europe – as long as all the Greece issues can be contained.

"Japan here is a standout – it has lower valuations, continued policy support, an improving corporate sector and 31 consecutive months of improved earnings," he adds.

[greengiraffe]

Ex-Japan PM Yasuo Fukuda uncertain whether GFC ‘is really behind us’
THE AUSTRALIAN JULY 30, 2015 10:39AM

Annabel Hepworth

National Business Correspondent
Sydney

Former Japan PM Yasuo Fukuda meets Tony Abbott before the Boao Forum for Asia conference. Source: AAP

Economic co-operation instead of protectionism is crucial, a former Japanese prime minister has declared, as he also warned of uncertainty about whether the global financial crisis is “really behind us”.

In an address to the Boao Forum for Asia conference in Sydney, Yasuo Fukuda said while there were signs of recovery, it was also the case that Asia and emerging economies, two of the most dynamic drivers of global growth, “have also slowed down as a whole”.

“We are not yet sure if the crisis is really behind us,” he told the forum.

Mr Fukuda was speaking as chairman of the Boao forum.

He said that driving growth with structural reforms “remains a major challenge to both developed and developing countries”.

Co-operation rather than protectionism “remains the only way out,” he added.

Mr Fukuda made the comments after Tony Abbott used his address to the forum to hit out at trade union and Labor campaigns against the China free trade agreement.