In its usual slow witted way, the Australian Securities Exchange (ASX) is gradually waking up the fact that US shale gas will likely put Australian natural gas producers out of business when it is unleashed upon world markets.
With gas trains costing in the multibillions, this is very serious business. US shale gas is on the market for a fifth the price of Australian gas. US gas can be landed in Asia at half the price of Australian gas. Local gas users are going ballistic because they can't get a guaranteed supply of gas from local gas producers except at extortionate prices. This assumes the US Government will give shale gas producers export licenses, but the first shipment of US gas will arrive in Asia in 2015 -- surely the first of a tidal wave of such shipments. Within 20 years, the US will be self sufficient in petroleum products and will be able to do away with economic lunacy like ethanol for fuel.
Of the Australian petroleum producers, Santos is the most exposed. Santos is a major partner in one of the three gas trains planned for Gladstone, a port city in Queensland. Santos is offering an inferior product, namely coal seam gas, which has only half the heating value of natural gas. The company is very unpopular with land owners, who are seeing their farms destroyed by gas wells. Coal seam gas is not produced by the notorious fracking procedure, though occasionally it is similar, but this doesn't make it any more popular with the public.
Most gas these days is sold on long term contract. With more gas coming on stream, more gas will be sold on the spot market, meaning customers will be able to play one supplier off against the other. Is it likely Tokyo Power, for example, will pay double, or five times, for Australian gas when US gas will do the same job?
For further information, see "US shale gas will change the world" by Jeffry Babb (News Weekly, 21 July 2012)
Friday 16 November 2012
Ratings agency model is broken
My father was a panel beater. He ran what the Americans would call a body shop. In the days before insurance companies got smart and started issuing their assessors with standard schedules for various types of collision damage, my father made a very good living by manipulating the prices of parts, labour and so on. He occasionally substituted second hand parts for new parts and so on, which wasn't strictly legal -- but it was highly profitable. Above his shop he had a battered sign which said "All care but no responsibility taken." According to my legal friends, that declaration has no legal status, which he found out to his cost several times.
The ratings agencies have always operated on the same principle. Their business model has always struck me as being very peculiar. And now an Australian judge has ruled that the "All care but no responsibility" model is worth about as much as the sign above my father's shop when it comes to offering them protection from legal remedies.
For those of you who don't know how their model works, the ratings agency will rate a product, and be paid by the firm issuing the product. Is it any wonder then that the ratings agencies rated CDOs (colatoralised debt obligations) AAA when they should have rated them c.r.a.p.? Of course, then no one would have invested in them, especially as some bodies have a statutory obligation to invest only in financial instruments with a certain rating.
The Federal Court of Australia ruled on November 5 that Standard & Poors was jointly liable with ABN AMRO for the losses suffered by local government bodies in Australia when they bought the product promoted by the bank. The ABN AMRO product, called a "constant proportion debt obligation" (CPDO), was a wonder of financial engineering best described in layman's terms as "double up or quit" when the market went down. S&P denied its ratings were inappropriate and aims to appeal the ruling. The AAA rating S&P gave the CPDLOs meant that the ABN AMRO product has as much chance of going bust as the US Treasury. A sadly inaccurate expectation .
Now the ratings Three Stooges -- S&P, Moody's and Fitch -- are defending some 40 similar cases around the world. The standard defence is that ratings are only "opinions" and no one should rely on them. If they are only opinions, why have them? And why is there a statutory requirement for many investors -- including government bodies -- to only invest in financial instruments with a certain rating?
Some say Moody's, commonly held to be the best of the bunch, must be good because Warren Buffet, the Sage of Omaha', is a major invest. Sorry, much as his acumen and integrity draw near universal acclaim, he is a businessman, not the Good Housekeeping Seal of Approval.
Instead, what about asking investors, who are using the service, to pay for it? Cash flow might suffer, but it would seem to be a better method of promoting accuracy. "The Big Short: Inside the Doomsday Machine" Michael Lewis's excellent account of the collapse in the CDO bubble, demonstrates what can happen when the ratings agencies go haywire. In the meantime, who are the ratings agencies kidding? Are they seriously saying they are producing a product on which investors can't rely? If so, why bother?
The ratings agencies have always operated on the same principle. Their business model has always struck me as being very peculiar. And now an Australian judge has ruled that the "All care but no responsibility" model is worth about as much as the sign above my father's shop when it comes to offering them protection from legal remedies.
For those of you who don't know how their model works, the ratings agency will rate a product, and be paid by the firm issuing the product. Is it any wonder then that the ratings agencies rated CDOs (colatoralised debt obligations) AAA when they should have rated them c.r.a.p.? Of course, then no one would have invested in them, especially as some bodies have a statutory obligation to invest only in financial instruments with a certain rating.
The Federal Court of Australia ruled on November 5 that Standard & Poors was jointly liable with ABN AMRO for the losses suffered by local government bodies in Australia when they bought the product promoted by the bank. The ABN AMRO product, called a "constant proportion debt obligation" (CPDO), was a wonder of financial engineering best described in layman's terms as "double up or quit" when the market went down. S&P denied its ratings were inappropriate and aims to appeal the ruling. The AAA rating S&P gave the CPDLOs meant that the ABN AMRO product has as much chance of going bust as the US Treasury. A sadly inaccurate expectation .
Now the ratings Three Stooges -- S&P, Moody's and Fitch -- are defending some 40 similar cases around the world. The standard defence is that ratings are only "opinions" and no one should rely on them. If they are only opinions, why have them? And why is there a statutory requirement for many investors -- including government bodies -- to only invest in financial instruments with a certain rating?
Some say Moody's, commonly held to be the best of the bunch, must be good because Warren Buffet, the Sage of Omaha', is a major invest. Sorry, much as his acumen and integrity draw near universal acclaim, he is a businessman, not the Good Housekeeping Seal of Approval.
Instead, what about asking investors, who are using the service, to pay for it? Cash flow might suffer, but it would seem to be a better method of promoting accuracy. "The Big Short: Inside the Doomsday Machine" Michael Lewis's excellent account of the collapse in the CDO bubble, demonstrates what can happen when the ratings agencies go haywire. In the meantime, who are the ratings agencies kidding? Are they seriously saying they are producing a product on which investors can't rely? If so, why bother?
Friday 9 November 2012
Aussie dollar just won't stay down
Despite admissions that the Reserve Bank of Australia (RBA) is selling the Aussie dollar, the little Aussie battler just won't stay down. Last time I blogged on the Aussie dollar, just over a month ago (4 October 2012), the Aussie was at 1.023. Today (Friday 9 November) it is at 1.0426, despite a 25 basis point cut in the cash rate to deter investors. The Aussie dollar has gone up, instead of down, as it was supposed to do.
As I predicted in my last post "Aussie dollar unlikely to collapse", there are a variety of reasons why the A$ will stay strong, not least the fact that the Federal Government is locked into structural deficits of $122 billion between 2013 and 2016. The government's spending plans are sheer lunacy. At a time of tightening revenue, the ALP has announced a $10 billion disability support plan (it was $1 billion when they tried to sell the plan to the States, but it grew) and a multi billion dollar universal dental plan. I developed the habit of asking my friends in the ALP "how many billions did they spend today?"
After the farce of the mining tax, which raised no revenue at a time which the Gillard government alleges is the height of the mining boom, what other piggy banks can they raid? A rise in the GST is the next cab off the rank, though the Greens are unlikely to obligingly commit political suicide to pass the tax, as the long-dead Australian Democrats did with the GST.
Faced with a strong dollar which is killing off what remains of Australian manufacturing industry, RBA Governor Glenn Stevens is desperate to get the A$ lower, but the tools he can use are limited. Apart from annoying traders by intervening in the FX market, he can cut rates again, but that would be about the last shot in his locker. A rate below 2.75% is getting into desperation territory. It's amazing how just about every market economist in Australia can misjudge the RBA's intentions so frequently. Governor Stevens is no doubt taking into account that a further rate cut is likely to encourage another housing bubble, and with housing affordability already heading into the political danger zone, another rate cut this year is no certainty.
The Aussie dollar has become a de facto reserve currency as central banks diversify away from the US$. Press reports indicate that the Swiss central bank, which is holding in excess of US$400 billion in reserves, which it has bought to keep the franc down, has been buying Aussie dollars direct from the RBA to minimise upward pressure on the Aussie dollar. While the US$ remains shaky and Australian fundamentals look relatively sound,, central banks can be expected to keep buying the Aussie dollar as a diversification from the US$ and the Aussie dollar will remain under upward pressure. There's not much the RBA can do about this.
As I predicted in my last post "Aussie dollar unlikely to collapse", there are a variety of reasons why the A$ will stay strong, not least the fact that the Federal Government is locked into structural deficits of $122 billion between 2013 and 2016. The government's spending plans are sheer lunacy. At a time of tightening revenue, the ALP has announced a $10 billion disability support plan (it was $1 billion when they tried to sell the plan to the States, but it grew) and a multi billion dollar universal dental plan. I developed the habit of asking my friends in the ALP "how many billions did they spend today?"
After the farce of the mining tax, which raised no revenue at a time which the Gillard government alleges is the height of the mining boom, what other piggy banks can they raid? A rise in the GST is the next cab off the rank, though the Greens are unlikely to obligingly commit political suicide to pass the tax, as the long-dead Australian Democrats did with the GST.
Faced with a strong dollar which is killing off what remains of Australian manufacturing industry, RBA Governor Glenn Stevens is desperate to get the A$ lower, but the tools he can use are limited. Apart from annoying traders by intervening in the FX market, he can cut rates again, but that would be about the last shot in his locker. A rate below 2.75% is getting into desperation territory. It's amazing how just about every market economist in Australia can misjudge the RBA's intentions so frequently. Governor Stevens is no doubt taking into account that a further rate cut is likely to encourage another housing bubble, and with housing affordability already heading into the political danger zone, another rate cut this year is no certainty.
The Aussie dollar has become a de facto reserve currency as central banks diversify away from the US$. Press reports indicate that the Swiss central bank, which is holding in excess of US$400 billion in reserves, which it has bought to keep the franc down, has been buying Aussie dollars direct from the RBA to minimise upward pressure on the Aussie dollar. While the US$ remains shaky and Australian fundamentals look relatively sound,, central banks can be expected to keep buying the Aussie dollar as a diversification from the US$ and the Aussie dollar will remain under upward pressure. There's not much the RBA can do about this.
Thursday 8 November 2012
Why do intelligent people do stupid things?
I have a friend who is a senior barrister, specialising mainly in commercial law. I don't believe he has a great deal of money to invest, but he is anxious to get a good return on his capital because he isn't getting much work at the moment. He described a seminar he attended which was run by a so called "property expert."
He was enthusiastic about the seminar. When he outlined the "expert" pitch I was not surprised to learn that it was the same pitch I had heard 30 years ago from a similar organisation when I first arrived in Melbourne. Of course, there have been several bad slumps since and anyone following these pitchmen's advice would be broke by now. The operation revolves around strata titling, which involves buying a blocks of flats, which had been rented out individually but are on a corporate title (or apartments as they are now called) and changing the title to an individual title, so each apartment can be sold separately. Today they are doing almost the same thing, except the apartments tend to come from slow-moving residential developments. Of course, they offer finance. You would be very silly to accept this highly leveraged offer, as are are no doubt getting a hefty commission.
My friend was tempted, but he is too intelligent to be caught, but smart people do get trapped into this sort of deal. But what about when an entire community is trapped? Banksia was a financial group operating in the northern part of Victoria, around Kyabram. It was, apparently, a generous funder of community activities and offered interest rates a bit above a bank. Banksia functioned like a bank, but was not supervised by the Australian Prudential Regulation Authority (APRA) as the banks are. Australian banks are among the most strictly regulated financial institutions in the world with self sustaining ratings to match. Banksia's funds were invested mainly in commercial property and dubious ventures such as golf clubs. Banksia had less than half the liquid reserves banks are required to maintain by law.
Cruel though it is to tell the girl who has lost the money she saved for her wedding or the retiree who lost his life savings that they are fools, but they are. Luck doesn't enter into it. How can an entire community be conned? It has happened numerous times in Australia. It's almost a carbon copy of what happened with the Pyramid financial group, also in Victoria. Pyramid caused a near depression in Geelong, where it had its headquarters. Geelong, about 70 kms south of Melbourne, is the largest provincial city in Victoria.
Not only country dwellers get trapped. The Teachers Credit Society in Perth, Western Australia, went bust when it invested most of its members' funds in a chain of health studios, which failed, like most other health studios did at the time. In a scandalous abuse of taxpayers' funds, the State government bailed the teachers out, even though there was no legal justification for doing so. But how could a government facing an election allow every teacher in the State lose his or her life savings?
The lucky electors of Kyabram have Paul Weller of the National Party representing them. The National Party can be expected to play true to form and put the thumb screws on the Premier, Ted Baillieu, whose Coalition Government is holding onto power by one vote in the Legislative Assembly, especially now the odoriferous Geoff Shaw's car usage has been referred to the police. It is thus a lay down misere that the trusting people of Kyabram will suffer, but not too much if the National Party can help it.
Why do people do these things? Greed is certainly right up there but you would have to be a bit simple minded to trade a term deposit in one of the Four Pillars, which have better ratings than many sovereign nations, for a percentage point of so more in an unregulated deposit taking institution. Then there's the "support the local business" argument, especailly if they cost effective marketingf such as supporting local sporting clubs. Again, people convinced by this argument can't be too bright, but for people in a regional area (including Western Australia) it is a very convincing argument. The gnomes of Zurich aren't popular in the country. Sheer irrationality in the face of money is a predominant factor in all these cases.
And one should not forget sheer ignorance. My mother said the only investments she has ever lost a lot of money on were "property investments". She means mortgage trusts where the mortgages were held over commercial property. When I told her mortgage trusts go bust about every 20 years, she was quite confused. "But the financial adviser told me to invest in them. If you can't trust a financial adviser, who can you trust?" Well said, Mum! When I added that most people understood the principle that the higher the interest rate, the higher the risk, she said she had never heard of it and she got her financial information by "talking to her friends." My mother does not subscribe to a daily paper.
I don't think people should be rescued from the consequences of their own stupidity, ignorance or bad luck for that matter People either make their own decisions, or they don't. Former Liberal Prime Minister John Howard transformed Australians from a nation of free people to a nation of mendicants. Bad luck used to be part of life, now Australians expect the government to rescue us from the consequences of our own stupidity.
He was enthusiastic about the seminar. When he outlined the "expert" pitch I was not surprised to learn that it was the same pitch I had heard 30 years ago from a similar organisation when I first arrived in Melbourne. Of course, there have been several bad slumps since and anyone following these pitchmen's advice would be broke by now. The operation revolves around strata titling, which involves buying a blocks of flats, which had been rented out individually but are on a corporate title (or apartments as they are now called) and changing the title to an individual title, so each apartment can be sold separately. Today they are doing almost the same thing, except the apartments tend to come from slow-moving residential developments. Of course, they offer finance. You would be very silly to accept this highly leveraged offer, as are are no doubt getting a hefty commission.
My friend was tempted, but he is too intelligent to be caught, but smart people do get trapped into this sort of deal. But what about when an entire community is trapped? Banksia was a financial group operating in the northern part of Victoria, around Kyabram. It was, apparently, a generous funder of community activities and offered interest rates a bit above a bank. Banksia functioned like a bank, but was not supervised by the Australian Prudential Regulation Authority (APRA) as the banks are. Australian banks are among the most strictly regulated financial institutions in the world with self sustaining ratings to match. Banksia's funds were invested mainly in commercial property and dubious ventures such as golf clubs. Banksia had less than half the liquid reserves banks are required to maintain by law.
Cruel though it is to tell the girl who has lost the money she saved for her wedding or the retiree who lost his life savings that they are fools, but they are. Luck doesn't enter into it. How can an entire community be conned? It has happened numerous times in Australia. It's almost a carbon copy of what happened with the Pyramid financial group, also in Victoria. Pyramid caused a near depression in Geelong, where it had its headquarters. Geelong, about 70 kms south of Melbourne, is the largest provincial city in Victoria.
Not only country dwellers get trapped. The Teachers Credit Society in Perth, Western Australia, went bust when it invested most of its members' funds in a chain of health studios, which failed, like most other health studios did at the time. In a scandalous abuse of taxpayers' funds, the State government bailed the teachers out, even though there was no legal justification for doing so. But how could a government facing an election allow every teacher in the State lose his or her life savings?
The lucky electors of Kyabram have Paul Weller of the National Party representing them. The National Party can be expected to play true to form and put the thumb screws on the Premier, Ted Baillieu, whose Coalition Government is holding onto power by one vote in the Legislative Assembly, especially now the odoriferous Geoff Shaw's car usage has been referred to the police. It is thus a lay down misere that the trusting people of Kyabram will suffer, but not too much if the National Party can help it.
Why do people do these things? Greed is certainly right up there but you would have to be a bit simple minded to trade a term deposit in one of the Four Pillars, which have better ratings than many sovereign nations, for a percentage point of so more in an unregulated deposit taking institution. Then there's the "support the local business" argument, especailly if they cost effective marketingf such as supporting local sporting clubs. Again, people convinced by this argument can't be too bright, but for people in a regional area (including Western Australia) it is a very convincing argument. The gnomes of Zurich aren't popular in the country. Sheer irrationality in the face of money is a predominant factor in all these cases.
And one should not forget sheer ignorance. My mother said the only investments she has ever lost a lot of money on were "property investments". She means mortgage trusts where the mortgages were held over commercial property. When I told her mortgage trusts go bust about every 20 years, she was quite confused. "But the financial adviser told me to invest in them. If you can't trust a financial adviser, who can you trust?" Well said, Mum! When I added that most people understood the principle that the higher the interest rate, the higher the risk, she said she had never heard of it and she got her financial information by "talking to her friends." My mother does not subscribe to a daily paper.
I don't think people should be rescued from the consequences of their own stupidity, ignorance or bad luck for that matter People either make their own decisions, or they don't. Former Liberal Prime Minister John Howard transformed Australians from a nation of free people to a nation of mendicants. Bad luck used to be part of life, now Australians expect the government to rescue us from the consequences of our own stupidity.
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