It is a laugh a minute now for the politico-housing complex. First up the RBA, which “economists” say was actually bullish last week:
Economists believe the market misinterpreted comments by Reserve Bank of Australia deputy governor Guy Debelle, whose speech on Thursday was received as dovish but in fact was “frank” and consistent in substance with the central bank’s position.
…”My sense is that the light of day has provided a bit more context to his remarks for most people,” said Deutsche Bank senior economist Phil O’Donaghoe.
…HSBC chief economist Paul Bloxham said the deputy governor also highlighted a number of bullish aspects about the economy, specifically the labour market.
First, the market under-reacted. Bonds and the AUD hardly moved.
Second, for the past few years the RBA has reflexively and repeatedly warned that rates are going to rise.When it suddenly comes out and confesses that in reality it has taken a wild and “uncharted” gamble on seeing off a housing crash, and mulls every easing measure under the sun, you have to be either stupid or corrupt to see it as anything other than a spectacularly dovish signal. In terms of forward guidance, it is the stuff of a deafening scream.
Sadly for Australia, the stupid/corrupt binary is exactly what we got from Jess Irvine:
There are other reasons for caution in reading too much into the weak September quarter figures, including a large drop in mining investment. Some major mines were closed for maintenance during the time period, which is a one off.
Non-mining investment intentions remain firm. The great “rebalancing” away from mining investment to non-mining investment is almost complete, with the drag from falling mining investment almost washed through the system.
Take a step back, and you can see that Australia has now successfully pulled off a great escape from the deflating of the biggest mining boom in our history.
Which major mines? As the ABS itself said “net exports contributed 0.3 percentage points to GDP growth driven by a decline in imports.”
Domain had some more priceless material on government panic:
The federal government and Reserve Bank of Australia are growing anxious about a home lending squeeze putting more downward pressure on house prices and the economy, because frontline bankers have become cautious about approving mortgages.
As Treasurer Josh Frydenberg and Opposition Leader Bill Shorten traded blows over who was more risky at amplifying a potential credit crunch, it emerged that bank chief executives are keen to increase home lending. But some bank risk officers, internal lawyers and branch staff had put the brakes on the supply of credit, bank and government sources said.
The royal commission’s intense scrutiny of responsible lending laws and banks’ verification of borrower living expenses, combined with softening home values in Sydney and Melbourne, have made some risk staff and junior bankers conservative in providing credit to would-be borrowers.
Let’s call that the “blame the teller’ defense. Front line credit staff only deploy policy, they don’t make it. They don’t set the price or models or standards or parameters or process of credit assessment, that all comes from Treasury and senior management. Nor will they ever be indicted for doing it for the same reason, they are cogs in the machine. It is management and executives that are spooked, quite rightly, and no matter how much the stupid and corrupt RBA and Treasury want to roll back to good ‘ol days of predatory lending it will take a long time for the Hayne RC shift to be undone. Too long to save house prices.
To wit, from the AFR:
IOOF Holdings chief executive Chris Kelaher got the call from the Australian Prudential Regulation Authority telling him he was about to be dumped in a bucket of woe just after 8pm on Thursday.
The shocked executive offered to come in and see APRA’s deputy chairman Helen Rowell as soon as possible. But Rowell was in no mood for talking.
After three years of being treated like a toothless tiger, APRA on Friday launched legal action against IOOF for failing to act in the best interests of superannuation members.
A chastened APRA has moved on to actually policing its function properly.
Perhaps what is most concerning about all of this is that if one looks inside what the RBA’s Guy Debelle actually said, he no idea what to do about any of it:
Monetary capacity matters too. The Reserve Bank has repeatedly said that our expectation is that the next move in monetary policy is more likely up than down, though it is some way off. But should that turn out not to be the case, there is still scope for further reductions in the policy rate. It is the level of interest rates that matters and they can still move lower. We have also been able to examine the experience of others with other tools of monetary policy and have learned from that. Hopefully, we won’t ever have to put that learning into practice. QE is a policy option in Australia, should it be required. There are less government bonds here, which may make QE more effective. But most of the traction in terms of borrowing rates in Australia is at the short end of the curve rather than the longer end of the curve, which might reduce the effectiveness of QE. The RBA’s balance sheet can also expand to help reduce upward pressure on funding, if necessary, as occurred in 2008.
That’s a confession of helplessness. The problem is borrowing costs is at the short end of duration. BBSW is rising again:
BBSW is an interbank market mediated through the ASX. It is where the country’s largest banks lend to one another on a daily basis. It should track the cash rate but has blown much wider since the Hayne Royal Commission lifting the cost of borrowing. This can only be counter-party risk as, post the Hayne RC, banks no longer trust each other’s credit quality. That means more out-of-cycle rate hikes are coming as funding costs rise. The RBA appears stumped by this with its only solution being to buy more RMBS. But that is only a life support measure with the RBA obviously unsure about how much and how long it will be needed given it has no solution to the underlying issue. It has lost control and, despite its bleating about standing ready to print, does not know what to do about it.
Thankfully, there are some MB-reading greybeards that know when to step aside from a sinking system. Terry McCrann is one:
On Wednesday I cautioned that the steady RBA rate decision was far less significant than the developing credit squeeze because the big four banks have been rendered catatonic by the Royal Commission.
You might say they’ve been frozen in the pleading glare of counsel assisting, Rowena Orr QC, and are now petrified at making a “bad” loan — so they’ve all but slammed the till on small and medium business and to a slightly lesser extent property investors.
…Consumers are stretched. Wages are growing at a modest pace, household debt and repayments are high — we are basically chewing through our incomes and having little left to save.
We could see a seminal shift in the RBA’s rhetoric at its first meeting back in February — not only formally burying the hike that’s been “somewhere in the future” for two years now, but opening the door in the opposite direction.
And Alan Kohler who had the money shot:
To be clear: a large amount of disability services are moving into GDP for the first time.
The private domestic economy — business investment and consumption — has collapsed, and is in recession.
That’s further reinforced by the 0.1 per cent decline in per capita GDP in the quarter.
And we may be only part-way through a long, and very big housing correction that will further shrink consumption — through the wealth effect — as well as business investment — through declining residential construction.
…Obviously, a rate cut next year — even a shift in RBA rhetoric towards an “easing bias” — would be a big deal, and wouldn’t be lost on property buyers.
But would it produce a forest of raised arms at auctions? Unlikely.
The problem is credit volume, not price, and that’s in the hands of APRA, and, more to the point, Ken Hayne.
It’s not the economy it’s credit, stupid, and it ain’t coming back.
