"Intelligent Insight"
In today’s market update we look at the shift to the negative, as the bears are back, suggesting the rally was in fact of the bear market variety. And with shaky news from China and the Euro area, ahead of Jackson Hole, we should expect more weakness. Gold was also weaker.
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Property insider Edwin Almeida joins me for another property related chat, as we move towards the start of the spring season. Some are saying the markets are turning, but we explore what is really going on as listing continue to rise, and more are expected to arrive on book soon. Also we look at a recent example of nasty surprises post purchase, what lies beneath?
https://www.ribbonproperty.com.au/
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The US mortgage industry is seeing its first lenders go out of business after a sudden spike in lending rates, and the wave of failures that’s coming could be the worst since the housing bubble burst about 15 years ago, according to a recent Bloomberg report.
There’s no systemic meltdown coming this time around, because there hasn’t been the same level of lending excesses and because many of the biggest banks pulled back from mortgages after the financial crisis. But market watchers nonetheless expect a string of bankruptcies broad enough to trigger a spike in layoffs in an industry that employs hundreds of thousands of workers, and potentially an increase in some lending rates.
More of the business is now controlled by independent lenders, and with mortgage volumes plunging this year, many are struggling to stay afloat. “The nonbanks are poorly capitalized,” said Nancy Wallace, chair of the real estate group at Berkeley Haas, the business school at University of California, Berkeley. “When the mortgage market tanks they are in trouble.”
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I recently discussed the creation of Kiwi Bank, a National Bank In New Zealand with one of its architects Hon Matt Robson. Kiwibank was set up 20 years ago at the behest of the late left-wing politician Jim Anderton, who believed the country should have its own national bank.
It now has more than a million customers but remains a minnow compared to its big four Australian rivals, ASB, BNZ, ANZ and Westpac. Home loans are Kiwibank’s biggest business where it has a market share of 6.5% to 7%. It doesn’t have the skill or capacity to handle accounts for larger businesses, the Government or the agri sector. It has a 2% to 4% share of the business market, which is mostly home loans secured against a business owner’s residence. Kiwibank recently posted a record profit, but it was still less than one tenth of the ASB profit posted just a few days earlier.
Now its just been announced By The Minister of Finance Grant Robertson, that the Government is borrowing $2.1 billion to buy Kiwibank’s parent company to keep the bank in Kiwi ownership after two of its existing Crown-owned shareholders wanted out. The Crown will take over Kiwi Group Holdings, which owns Kiwibank and NZ Home Loans, under an agreement which allowed the shareholders to sell their shares to each other or the Crown from October 31 last year. ACC, which owned 25%, and NZ Post, which owned 53%, wanted to exit their investments.
The NZ Super Fund, which owned the remaining 22%, was interested in buying some or all of NZ Post’s stake but wanted the flexibility to bring in private capital and have the option to sell to private investors in the future, which the Government rejected as it wanted to ensure Kiwi ownership. T
he Government said it did so to make sure Kiwibank remains fully New Zealand owned. The move thwarts any attempt by the NZ Super Fund to acquire all of the bank and then restructure it.
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There was an important article in The Conversation today, arguing that China’s sabre-rattling around Taiwan underlines the need for Australia to be prepared for conflict in the South China Sea.
This is because past over few decade all but two local refineries have closed. So even while we export crude oil, we import about 90% of refined fuels. So of particular concern is our reliance on liquid fuels imported via South China Sea shipping routes. This reliance has become more pronounced because Australia, has chosen to apply minimal regulation or government intervention in pursuit of an efficient market that delivers fuel to Australians as cheaply as possible.
There are five main options to reduce our vulnerability: diversify import sources; increase local refining capability; reduce dependence on fossil fuels; increase strategic reserves; and educate and prepare the population for possible shortages. All will require government departments planning together with various industry sectors, including fuel retailers, refineries and import terminals, manufacturing, freight transport, maritime, defence, communities and other relevant stakeholders.
Or we could just keep our fingers crossed, and hope the market will magically fix the problem, though I suggest this is a pipedream.
Once again Mr Market has the potential to crush and destroy. Yet this approach in wired into the very fiber of Government and Treasury.
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CBA says some customers are yet to experience the full force of the recent RBA cash rate rises, and NAB says more are already in strife. Given the market expectation of a cash rate at 3.5% next year, this suggests we are only in the foothills of the pain which will continue to build.
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As expected, the Dow snapped a four-week win streak on Friday, as investors paused their bullish bets on stocks amid fears that Federal Reserve Chairman Jerome Powell could push back against the idea of a dovish pivot at his Bankers Fest at Jackson Hole next week.
It was a decisive pivot that snapped the longest weekly rally since November, as short-sellers resurfaced and investors turned cautious after Federal Reserve officials beat the drum on hiking rates. Treasury yields climbed, while the dollar capped its best week since April 2020.
As a result, the S&P 500 Index notched its biggest daily decline since June, sending the benchmark to its first weekly loss in five weeks. The tech-heavy Nasdaq 100 under-performed major benchmarks, with growth-related stocks among the hardest hit Friday. Meanwhile, Wall Street’s fear gauge, the Cboe Volatility Index, jumped the most in more than two weeks, back above 20.
Note though that the expiration of $2 trillion in options, obliging investors to either roll over existing positions or start new ones, set the stage for a volatile session as failure to break a key threshold for the S&P 500 around 4,300 appeared to open the door to selling positions. And bears pounced. A basket of the most-shorted stocks dropped more than 6%, extending its weekly loss to 12% and giving short sellers their best week since March 2020.
Against a backdrop of fear and volatility, the dollar marched higher for a third day in a row. Treasuries fell, with the two-year Treasury yield, the most sensitive to policy changes, jumping 4 basis points.
Ahead of the Fed’s Jackson Hole gathering next week, officials reiterated their resolve to raise rates to curb stubbornly high inflation. Fed officials have made clear that they need to see clear and convincing evidence that price pressures are subsiding before slowing or suspending rate increases.
Minutes released Wednesday from the Fed’s July 26-27 board meeting reiterated that sentiment, noting inflation remains “unacceptably high.”
Taking that into account, the U.S. central bank has all the ammunition it needs to continue raising interest rates until it sees CPI coming back down to its 2% target. In that case, the truth is the markets are set a fall and the battle for inflation dominance will likely run for much longer than the markets have been expecting – we truly are now entering the Twilight Zone.
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Property in the Illawarra, south of Sydney saw a significant run up in prices through COVID. However, prices are now potentially on the slide as illustrated by recent examples from the listings sites. We discuss some examples, courtesy of research by Cookie Boy, and add in data from our core models to show how mortgage stress is playing into this. We also reveal our latest scenarios at a post code level.
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The ABS is to introduce a monthly version of CPI, based on interim figures, though the “official” version will still be released warch quarter. So we discuss the implications.
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My latest chat with Tarric Brooker, @AvidCommentator on Twitter.
His charts are available at: https://avidcom.substack.com/p/charts-that-matter-19th-august-2022
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