Call to rein in Big four banks

This is the title of an article in the financial press of Australia.

A study found that for every $100 spent in Australia, $3 ended up as bank profit.

Not bad for banks but not so great for Australian consumers.

For those who don't know the banking section in Australia. The following is a brief overview.

There are only 4 Australia banks which dominates over 80% of the banking business, so called big four. There is a "four pillar" policy in Australia which prevents banks from taking over each other and being taken over.

This regulatory barrier served Australia banks really well and create a fairly low level of competition, which subsequently breed "super profit" for the banks.

One simple example is that US banks has long been paying its customer to win and keep its retail savings business while Australian banks charges customer a monthly fee typical of $5.

Only recently the banks started to adopt a fee-free business model.

The sentiment toward banks has always been negative.

The article suggests a number of policy to rein "super profit" from the big four.

Some of the suggestions are:

- limit mortgage rate increase to changes in Reserve Bank cash rate
- laws to ensure that credit is not pressed on people with low income

These proposed policies appears to be fairly heavy handed.

The harsh regulation may simply add cost to banks and push banks to seek other means to fill in the void. Consequently the regulator may come with other policy to stop banks once again.

This negative cycle of playing "catch me if you can" does not serve in the best interest in either consumers, banks nor the regulator.

I would suggest government to consider policy to promote competition rather than prescriptive regulations. Let the invisible hand to take its own course, which will be more acceptable and effective in bringing benefits to consumers.

One way to increase competition is to open up the banking sector in an orderly fashion. Try to dialgue with both domestic and foreign banks to better achieve its policy intention.

Cooperation is the key here. Together we can build a strong, competitive and more resilient banking sector in Australia.

Japanese Yen

There has been talk about the strength of Yen against major currencies.

Yen USD cross rate has reached multi-year high in recent times.

The Friday disappointing US payroll number didn't help and USD plunged sharply against Yen in early trade.

One thing investor can take cue of is the strength of Yen is more owing to weakness of US economy rather than underlying strength in Japanese economy.

With record high public debt, it is very difficult to imagine a strong Yen relating to a booming economy.

Many savvy experts recommend this a good time to short yen as a long term play due to the weak economic fundamental.

My inner trade has told me that further upside of Yen to USD is limited. A gradual short postion on Yen does not appear a bad strategy.

However, bear in mind that this trade may take some time before it pays off as USD isn't the most desirable currency of the globe right now.

Trade wisely

Market is unclear

Market appears to have bounced back from the recent short-term oversold position.
However, it started to show cracks again.

Fundamentally, the global economy is weak. US, UK and Europe countries remain in fragile state of economy. I see no near-term solution to this deep trouble with debt.

If the government around the world start cutting into their spending, it spells recession.

If the government continue to leave interest rate at virtually zero, the economy will be okay on life support for now but it will create mass inflation in the long run.
It is probably that there will be hyper-inflation.

This is exactly what you experience in the asset market right now. Both US treasury and gold price rally at the same time. One would have expected that the return on these two asset should be the opposite of each other.

It means that shorter term environment is deflationary whilst inflationary in the longer term induced by the mass amount liquidity to chase too little goods once economy starts to recover.

One conclusion this does not look good either way.

From safety to greed

It is amazing to experience the roller coaster ride from a credit induced recession.

Investors sentiment went from concerning return of capital to chasing return on capital again mere 18 months after the arguably most servere economic downturn of all time.

Many simple lesson can be learnt during the process:

1. How quickly people can forget about all the gloom and doom in the midst of the global financial crisis.

2. Unlevered investor has the upper hand to sit out the trough during recession when market goes into disarray while the levered ones do not have such luxury

3. No asset class price can continue an upward trend indefinitely and vice versa regardless of the fundamentals.

4. The entry price remains the single biggest determinant of the resulting return on asset.

5. Market can stay irrational longer than one can stay solvent.

A deeper look into housing affordability

According to the 6th annual demograhia international housing affordability survey, Australia capital cities possess 22 of the 62 severely unaffordable markets in this years survey.

The survey uses median house price to gross annual median household income as the main metric to measure the housing affordability.

Sydney ranked second serverly unaffordable house market with a median multiple of 9.1, Melbourne at 8.0, Adelaide 7.4, Darwin 7.1, Perth 6.9, Hobart 6.8, Brisbane 6.7 and Canberra at 5.8.

The report attributes the reason for the servere housing unaffordability of Australian major cities to be "plan-driven" land use regulation instead of more responsive "demand-driven" process.

The report compares Sydney and Melbourne ("plan-driven" land use regulation) to Atlanta and Dallas-Fort Worth in the United States ("demand-driven" land use regulation). The statistics presented in the report were mind-blowing.

In Sydney and Melbourne, the median mutiple is 9.1 and 8.0 respectively. While for Atlanta and Dallas-Fort Worth is 2.6 and 2.7 respectively.

It takes 6.25 to 14.5 years for the residential land to be designed for development and the completion of the first home in Australia due to the more prescriptive use of land regulation.

The same process in Atlanta and Dallas-Fort Worth takes only 1 to 1.5 years as a result of demand driven process.

If you are unfamiliar with the median multiple metric described above. Try the % of gross annual income used to mortgage on median house price.

Sydney 57.4%
Melbourne 50.4%
Dallas-Fort Worth 13.4%
Atlanra 16.8%

If you are still not convinced, take a look at the monthly mortgage payment.

Sydney $2,968
Melbourne $2,521

Dallas-Forth Worth $790
Atlanta $680

The numbers above speak for itself. The most ironic thing about the comparison is the following:

Population growth in Dallas-Fort Worth was much faster than Sydney which is now nearly 50% larger than Sydney.

Atlanta population is now 50% higher than Melbourne and more than 25% greater than Sydney.

Yet the median multiple for Dallas_Fort Worth was 3.5 in 1981 and it dropped to 2.7 by 2008. For Atlanta, the median multiple remained the same at 2.6.

So what does this tell you about demand for housing in two cities with significantly higher population growth than Sydney and Melbourne?

It speaks pretty loud and clear to me that Australia house market has been in an increasingly dangerous bubble territory owing to the lack of affordable land due to the prescriptive and "plan-driven" adminstrative process.

To share some personal experience with you. I contacted the Kogarah City Council enquiring about criteria on land sub-division in early February 2010. The following was what happened until I received a response in mid-March 2010.

a) I called the council on one Friday afternoon to enquiry about sub-division of land. I was told the person in charge was busy at the time of my call.

I left my contact details and was promised a call back latest by the following Monday.

b) no response until the following Wednesday. I sent an email detailing my enquiry. The email was not replied one-week later informing that the person in charge was on leave.

c) Sent a reply email to request to speak to someone else in the Kogarah council. It was told that the person on leave is the only one knows anything about the sub-division of land. Therefore, I need to wait for the person to come back from holiday. I was also told I would be contacted when the person returns. A date was provided on when the person will return.

d) One week after the supposing return date, there was still no response provided. I had to send an email yet again to see when the council can provide a response.

e) one day later the person called. The phone conversation lasted less than 60 seconds.

A 60-second phone conversation regarding the criterias on sub-division of land took a local council over 6 weeks to respond. You can imgaine how efficient the government works. (Be sure to check my previous post on difference between prviate and public sector).

One more important thing to note about the prescriptive land use regulation.
This is not the "years of supply" of land that matters but the supply of affordable land.

The survey points out:

The prescriptive land use regulation provides land seller and buyer the reliable information on where the development will occur. This tends to significantly raise the price of land and eliminates the supply of affordable land.

By the way, the report defines affordable as having a median house price to gross income ration of 3.0 or below. This figure was last seen in Australia in 1980s. This figure will be an insult to many experts in the property market.

Difference between private and public sector

This is one line I think it is so true. I quote from a blog called Calafia Beach Pundit:

The private sector is all about survival: if your revenues drop, you have to cut your spending. The public sector is all about politics: your survival and prestige is a function of the size of your budget, so you never consent to a cut. Instead, you always ask for more and more spending authority, no matter what.

This is exactly why the budget deficit will not go down but up. There is no notion of cutting costs in a public sector despite all the talks and spins around rein the spending.

Stimulus may not be so stimulating after all

Do you know that stimulus may not work the way we expect. It can and in history it had negative impact on GDP growth defying its very intention.

During early 1990s, Sweden adopted aggressive fiscal expansion to revive the economy. Guess what happened? Private consumption and business investment fell sharply and economic growth was pushed into negative territory.

I suspect that the suddent increase in public spending crowded out the private spending.

Stimulus may have worked this time. However, it didn't solve the very pressing issue which brought us into this mess at the first place i.e. excessive level of credit and credit growth.

Imagine when the world reaches a debt level such that the lowest level interest rate will not prompt household to borrow and spend money. Many gurus called it the "zero" hour. Some argued that we have already had a tasteful of it.

Can you really imagine that? Well there is no need to imagine. Japan was and still is a perfect example.