Price war good for consumers

A few game changer happening from fast food to retail and even mortgages.

Here it goes.

1. KFC has a value meal including a burger, fries and drink for only $5.95. This is a price I haven't been for a long time.
Other fast food chain has responded with even more eye-popping deals such as $4.95 meal from Hungry Jacks.

2. Coles started a retail price war from its 'pricing staying down' campaign. Two litre milk price is now $2.0 for its own brand. Woolworth, the other biggest retailor responded with matching price.

3. National Australia Banks (NAB) delivered a messages loud and clear with its intention to break away from the image of 'big four' banks.
It offers to pay $700 mortgage exit fees for Westpac and Commonwealth (CBA) mortgage customers to switch loan to NAB.
NAB has also been offering the lowest standard variable mortgages amongst the big four as well.

CBA responded with offer to pay $1200 to NAB customers who switch their mortgage to CBA as well as $100 for NAB's credit card and deposit customers to switch.

Game on.

The bottom line is when there is competition the consumers will stand to benefit to some degree.

Bear in mind though, someone will have to pay for all these, either the banks take a hit to its revenue or pass the cost to other customers (e.g. business customers).

Interesting to follow further developments in this space.

Australia housing

People keeps asking the same question:

'Is Australian property market at a bubble state?'

'If so, when will it pop?

My answer will be:

'Yes'

and

'not in the short term' and 'only when the time is right'

It may not sound very much but the point to make here is that in a market with price to average income of 7 time or more, it'll be hard not to call it bubble.

However, the economic condition has not reach a level that will pop the bubble yet.

The interest rate is still at a subdued level depsite rising.
The employment market has picked up and is likely to do so in the future.

So long as people have a job, the mortgage repayment will be the last to forego.

The implication for wannabe owner occupier and investors are very different.

The primary question an investor should ask is 'is the return on investment enough to commensurate my risk?

Whereas wannabe home owner should ask 'am i able to afford the repayments at the current interest rate level and at time when it increases by another 200-300 basis point?

If I were an investor, I will stay clear of proeprty market in general because the expected future return based on current valuation is likely to mean very anemic return at best.

As an wannabe onwer occupier, I will have no choice but to live with this ridiculous property price if I strive to get into the property ladder asap even knowing that I will probably be subsidise someone else's lifestyle in the not-so-distant future.

Greatest asset in life

Just came back from an overseas secondment to spend the Christmas & New Year break with family.

Mum told me that she fell over and hurt her whirst. What relevance does this has?

She accidently went to see a non-family doctor and happened to meet the best general practitioner she has ever came across in her 60-year life so far.

The doctor is very patient and willing to help. Patients walk out of the clinic both of their thumbs up.

One patient told mum that the doctor has gone to the length to call patients 9am to check up on their progress.

It makes me thinking that the greatest asset that one ever has is his/her job, not the million dollar house one lives in or $150,000 invested in equity with a $50,000 collateral.

If most people realise this, we would have avoided numerous financial crisis in the past and many yet to come.

Housing bubble

There are divided opinions about the bubble status of Australian housing market.

It has enjoyed mostly uniterrupted growth over the last decade.

Any real house prices increases in excess of real GDP growth will eventually lead to asset bubble and consequently crash. (i.e. consuming more than one produces is not sustainable)

House bubble has a much larger implication for the economy than a stock market bubble.

The reason is very simple. One needs a roof over its head but not investment in stocks.

Once the housing bubble pops, it will have a broad impact affecting the rich and the poor. Because of the significant amount of capital tied into housing for majority of people's life.

Effect of bubble status will take years if not decades to work through the system mainly via deleveraging of debt starting from the least cost effective forms of debt.

This is essentially the American story. With 70% of GDP relying on consumption, the massive glut of unsold inventory and foreclosed home will take the livelihood of the American consumers when the unemployment is struck at 9%-10%.

What it means for Australian housing market. This is a perfect lesson that most Australian won't learn until it eventuates.

I am not saying the Aussie house price will collapse in near-term. In my opinion, the house market remain reasonably supported by strong employment and neutral interest rate environment.

An outright crash is unlikely. However, the house value has reached a level such that any future return on this asset class will be at best anemic.

If you were told by many that the Australian house market is a sure bet for future financial security, you have been warned.

If history is off any guidance

If history is of any guidance, the first thing comes to mind is that history can be so invaluable to learn from in order not to repeat them.

Yet it is amazing how history repeated them over and over again.

As many of us look forward or even try to predict/forecast the future, we seems to ignore what history has told us over and over again.

When many experts say that "this time is different", the presence looks awefully similar to what has happened in the past.

It is true that history never repeats itself exactly. Many of the causes of modern day society problem appears to be the same triggers that led to regretable and irreversable consequences in the past.

Here is a wonderful place to reconnect and remind ourselves with how far human races has come along.

http://www.youtube.com/watch?v=6YJfOZkriyk&feature=player_embedded

Invest wisely

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