Joye returns to bubble from whence he came

There have been times when Chris Joye has made good sense. As well as times when he becomes property bubble obsessed. Sadly we’re back to the latter as he pushes Frydenberg’s mad house price bubble plan today:

There is considerable value in the RBA demonstrating that QE means it has ample monetary policy ammunition left. At the same time, it is appropriate for Frydenberg to maintain his laser-like focus on building fiscal space through budget surpluses. History has shown that it is much easier to get central banks to normalise interest rates than it is to convince profligate politicians to balance their books.

Frydenberg’s inaugural budget surplus last financial year (on the net operating balance and fiscal balance measures), which we had long forecast, was an important first step along the road to meeting the government’s core electoral promise of repaying Australia’s record public debt.

So why is the current QE thinking so muddle-headed? First, buying government bonds is unlikely to do much good in Australia. The RBA’s former deputy governor, Stephen Grenville, explained why during the week, although he overlooked the alternative solutions. Because most Australian private debt is floating-rate, as opposed to fixed-rate, it prices off the short-term cash rate plus a credit spread, or risk premium, rather than long-term government bond yields. As a consequence, all Australian banks hedge their wholesale funding back to a spread above the cash rate or a proxy therein, such as the bank bill swap rate, which itself embeds a bank credit risk premium.

This means that the RBA buying long-term government bonds is not going to do much to influence domestic rates. It might put downward pressure on the Aussie dollar, which will be stimulatory. But even this outcome is uncertain because the exchange rate is determined by global forces over which the RBA has limited control. Indeed, restricting Aussie QE to government bonds exposes the RBA to non-trivial reputational risk if it is perceived as a failure.

Another concern with buying government bonds is that doing so could further reduce bank profitability in a climate where they already face a multiplicity of return-on-equity headwinds. APRA and the RBA require banks to hold up to one-third of all government bonds as part of their emergency liquidity books. If the RBA crushes the interest rates on these assets, it will crimp bank profits and reduce the probability that they improve product rates.

The one area where QE is likely to have a profound impact on savings and borrowing rates is if it compresses the risk premium above the cash rate that banks fund themselves at. As I have explained before, credit spreads on the banks’ senior bonds are some eight to 10 times wider than in 2007 and elevated by global standards, even though risk-weighted leverage has halved. It is well-known that Aussie banks have to pay materially more to raise money in global markets than similarly-rated peers. Our internal analysis shows that this is driven by the skinny pool of capital domestic super funds make available for investments in local fixed income given their huge equity biases (the latter is an artefact of super funds being judged based on their raw, not risk-adjusted, returns, which motivates them to chase the riskiest possible equity, not debt, investments).

The good news is that there are many ways the RBA can crush this intermediated cost of capital while also ensuring banks pass on the savings to customers. The first would involve lengthening out the term of the RBA’s current overnight lending operations via its repurchase (or “repo”) arrangements to much longer tenors of say one, two or three years. The Bank of England did something similar in 2016. The RBA could further require any banking tapping this liquidity to agree to pass on the savings to depositors and borrowers. This would contract funding risk premia while also reducing the quantum of wholesale bond issuance, which would reinforce the positive effects on a second-order basis.

A complementary solution would be for the RBA to commit some of its QE program to a similar form of lending via direct asset purchases of any securities that the RBA accepts as collateral under its repo operations. These include government bonds, senior bank bonds, and AAA-rated asset-backed securities.

The Fed, ECB and Bank of England customised their QE initiatives to their local peculiarities and the RBA should do likewise. We don’t really have a corporate bond market, so buying what little corporate paper is issued makes no sense. In contrast to the US and Europe, our banks are much more heavily reliant on wholesale funding, rather than deposits, to underwrite the loans they extend to businesses and households. Accordingly, targeting intermediated funding costs is crucial to ensuring the RBA’s monetary policy transmission mechanism works properly.

It is not widely appreciated that we have previously profited from both these forms of QE. During the 2008 crisis, the RBA extended its repo terms to 12 months at ultra-low-cost, expanding its balance sheet by 50 per cent. Those operations were about maintaining liquidity. This time around, QE would focus on enhancing the RBA’s transmission mechanism.

If buying bonds lowers the risk free rate in Australia it will also lower bank wholesale borrowing costs so it will do something for mortgage pricing though certainly it’s a law of diminishing returns. It will also make corporate borrowing cheaper, a good thing.

Joye’s other measures will only help make mortgages cheaper, and extend moral hazard even further into the banking system, which will lift the AUD.

Neither is not a good idea given mortgage mispricing and lost competitiveness is how we got to the need for QE in the first place.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Comments

  1. Legend in his own lunch box, man of debt and builder of houses of cards…don’t play against this man when it comes to Fiddle Sticks or Jenga. Joye the wombat can always pile on another straw or block and make it look like an intellectual pursuit.

    After all, with interest rates at almost zero and QE in the wind the Straylian economy is a fine picture of health. No worries mate, Joye is a dead set genius – he says so himself. Must be true.

    But just what else do you offer if you are a wanker at a wank fest? You go at it faster and harder that anyone else and hope to draw a crowd.

  2. One thing that Joey has been is “right”, much more often than not.

    Whether one thinks he makes sense or not is rather beside the point.

    There are a lot of similarities between Chris and I. But he does like pies much more.

    If you think that more cheap government money for the banks isn’t coming, you probably have rocks in your head.

    • He’s more right because he has the ear of Treasury and others. He’s probably the one planting all these stupid ideas in their heads.

      “There are a lot of similarities between Chris and I.”

      Have you got a wolverine beard too?

    • That is completely beside the point Peachy.

      Joye may be entirely right that we are destined to make the same mistake on QE as Japan and Europe but he shouldn’t be recommending it, which is what he is doing.

      A QE of his design will either (a) leave billions in extra liquidity sitting idly in the financial system; or (b) direct it into speculative house price inflation.

      In neither case will the money touch the sides of the real economy, which is what is needed and that is HnH’s point. Make no mistake, we need the banks to lend more – but also differently.

    • Professor DemographyMEMBER

      Exactly. Joye is just realistic about what is going to likely happen from a government policy standpoint.

      Right now we are going to have policy eek out the last bits of credit possibility and demand pumping. There is still room to do this and they will and we will not see a crash and we will see a further hollowing out of the economy. Totally.

      Where I think Joye is blinded (at least publicly) is that serviceability does not have a lot more headroom after these cuts and does not have any joye coming from any type of recessionary unemployment streak or external shock.

      But Joye admits that in that scenario we will likely see a very very big house price hit. He’ll be right then too.

      It’s all about some nuance. Something that is lacking among the bears and the bulls on both extremes.

      • St JacquesMEMBER

        Excellent post. He really is anticipating their moves, it’s how we roll until we can’t.

    • You can have a terrific record at predicting the spread of white ants and fungal infections too – and if there is money to be made in rot and morbidity, wacko, instant genius.

      The Australian economy has been financialised by people who have no concept of value – only profit. It is run by bean counters and debt pushers. The very idea that more speculation and easy money in property is the solution for the problems caused by speculation and easy money underlies a widespread pathology. Joye is not the solution, his type are the problem. Sure, more cash on the way. Tell me when we reach Nirvana and all the problems of systemic decay are solved.

      • The problem though is a monetary one. There’s too much debt in the system; and for people to have a surplus to pay it down and stop a “system seizure” the RBA must run a deficit because no one else is willing right now. Everything going on right now to encourage credit is trying to get the household sector to continue to be the one carrying the economy because no one else is willing to. Government needs to pay down debt, business particularly banks have a lot of offshore debt or want more profit growth and households are massively indebted. Without nationalizing our mines and repatriating all export monetary flows how are we going to pay all of this off?

        • Agreed. But the problem is now extremely complex as e.g. without much inflation and upward trend in per capita GDP (i.e. salary stagnation) asset debt cannot be reduced easily over time. Similarly, savers are hit by reduced incomes and spending declines.

          I mention this because the models driving policy decisions are poor at handling complexity and next to useless when stochastic events and chaos begin. And if we are relying on soothsayers we’re stuffed.

          Today it has all the hallmarks of a system that has become unstable and is at a tipping point, in part because the financial paradigm became detached from society, politics and public values. Banking and finance detached from everyone else’s reality and created a fantasy of money detached from real value.

          In the big picture it is an ethical, social and governance problem that led to the current monetary policy that has given rise to the growth of the cancer of neoliberalism with the Typhoid Mary of conventional economic thinking that seeks profit, not value, and creates money from thin air with no value behind it. This has spread through the western world. It is now seen to be the ‘reality’ as it supports the food chain of self interest that has spread like a disease.

          More of the same kicks the can down the road.

          Old dogs with terminal cancer get put down. Some owners fight to the end and prolong the agony – for everyone. What the Australian government does is to ask the cancer itself what it requires to survive a little longer. For our government has mistaken the disease for the patient. Our governments (ALP and LNP) represent markets, not the people. That’s how we got here and that’s the real problem.

          • Sure we can put the dog down but we’re all going down with it. When these things happen its usually the poorest that wear the most pain; sadly the ones who contributed least to this mess. Everyone can identify the problems; but no one knows the solution to get out of this mess. Until we get away from the “let the world burn” mentality people and can actually suggest a way out other people who offer some hope will naturally be the ones people listen to. Buying time seems to be the smart move; especially since it gives some hope we won’t be stuffed or at least not so soon anyway.

    • The thing is, punters loaded themselves up on debt when they thought it meant they would get richer via equity mate. But when the risks are high, capital growth 0 or null, then what’s the point? Why do it? Same with negative gearing, it only works in an upwards vertical market, otherwise you’re bleeding money and it’s a dumb investment. I guess dumb investing hasn’t stopped anyone in this country in decades..

      • Why do it?

        Because you need somewhere to live and a substitute for land hasn’t been invented yet.

        They will exploit this inconvenience for all its worth.

    • Or perhaps you have this arse about face. Perhaps, he is the conduit of Treasury ideas. A purveyor of trial balloons, if you like.

      He appears to know what Treasury will do next precisely because he sits down with the cvnts to discuss their next great wheeze.

  3. Whenever I read economists writing on monetary policy, such as in the above article, it seems more like alchemy or voodoo to me, and not at all about human wellbeing on planet earth.
    Am I alone in this regard?

    • Nope. But if a big enough group of like-minded people inhabit your bubble, people like Joye believe their efforts to be normal, rationale, sensible and right. He supplies the analytical flatulence to keep such an ideological bubble inflated and people pay to sniff the air. Together, such people can never admit to themselves that they are part of the problem at a fundamental level as they seem to be in the majority and use the ‘blowfly’ rationale – how could anyone say that poo does not taste good? Just look at us all scoffing it down!

      To change ideology and reject what they have worked to support all their lives would be impossible as this is their entire basis for their self-respect and status – a financial and economic delusion that is eating society and the planet.

      Such people are dinosaurs who believe that the Cretaceous will go on forever. And right up to the comet impact they will be right.

      • “Together, such people can never admit to themselves that they are part of the problem at a fundamental level as they seem to be in the majority and use the ‘blowfly’ rationale – how could anyone say that poo does not taste good? Just look at us all scoffing it down!”

        Lol, sums up the Australian economy perfectly!

        • Lots of people like ‘Joye to the World’ can be perfectly ok people as individuals. The problem with the ideologically obsessed is that they are capable of any evil, but blind to personal responsibility being part of it. That’s what makes them dangerous. Chris Joye is just another loud-mouth soothsayer reading palms and gazing into crystal balls and second guessing the will of the temple Gods. They were highly regarded in the days of Zeus and Thor and so they are in the era of the RBA and the Fed. Just why we need them in the economic peanut gallery says much more about the pack instinct of the acolytes than the existence of people who talk [email protected] for a living.

    • It’s all about human well-being, the well-being of those well fed already (such as Chris) and those in charge… and nothing about the well being of the plebs who need to take on the debt.

    • Proper economic theory can usually be subjected to the ‘common sense test’ to discern its veracity which is why you’re currently confused.

      Neo-classical economics will be one of the casualties of the next major crisis and those who write the history of the last two or three decades will not be kind to all who have been advocates of contemporary economic theory.

    • St JacquesMEMBER

      but, but ,but you can’t lose on housing coz it’s gubimint guaranteed. Only losers invest in anything else.

    • There are plenty like Miriam. Probably running into millions. You’re right – things will not end well.

      The housing bubble is toast – Scummo and Fraudenburg are squeezing the last blood from it. Meanwhile, in the background, the rest of the world is sliding into economic recession despite zero and negative rates. And here’s the joke: the fckn idiots piling in to property right now are ignoring the bigger macro disaster unfolding in front of their eyes – one which will shortly wash up on straya’s shores in the form of sharply higher unemployment. Those taking on big debts right now are committing financial suicide.

  4. I always find that he always weaves these incredible intellectual webs but if you brush that sh!t aside there’s just the usual naked self interest (sorry Peachy, since you two peas are so alike in the pod).

    • Yep, you have to wonder if someone like him running a fund and having access to treasury and the other nerds if he should be looked at for insider trading.

      • It’s not insider trading if everyone is in on it. And everyone is in on it.

        Treasury has been telling you to buy housing for over a decade. Hollering it from the rooftops. why do you fail to hear them?

        • There are two types of people in the world, my friend (to paraphrase the Man with no name):

          Those who believe the Govt has the power to keep the housing bubble aloft indefinitely …. and those who don’t

          Place bets accordingly

  5. Again, an absolute pig of a man who needs to be tied to something heavy and thrown into the ocean.

  6. I’ve said it repeatedly, and I’ll keep saying it. Joye was the principal author of the 2003 PM’s Task Force Report on Housing Affordability. It was comprehensive and clear. Land supply as managed by local and State government needed reform if housing was to be stabilized.

    PM John Howard rejected the report out of hand. Joye’s behavior since then can be rationalised as a “screw you” reaction to Australia. If they wouldn’t listen to sense, he might as well make a killing out of the stupidity meanwhile.

    I am prepared to believe that he is one of the world’s smartest and bravest experts on property cycles – and I fully expect him to “go short” at the right time and make another killing. He has an understanding second to none, of the behavior of property markets “post” the mania for “saving the planet from urban sprawl”. I’d love to know what he read and learned from – I suspect Phillip J. Anderson; but I can tell he knows more than Anderson. While others were predicting the inevitable crash too early, Joye was fronting up saying “I’ll take the long end if you want to go short”. But at some stage he’ll go short himself, possibly without telegraphing it too widely.

    • Lordy. No one’s arguing that he doesn’t have a good read on Aussie house prices. But this piece wasn’t a housing prediction it was a policy prescription for the economy. And it was atrocious. He may be a property genius but he’s adrift on the economy.

      • Sorry, Les, but QED. Going back years, the early participants in this forum had long debates on the land supply factor, and it clearly became obvious that there is a certain type of person with whom it is a waste of time arguing from the abundant evidence. Obviously there are ideological or self-interest stumbling blocks that close minds to the evidence. No one segment of idiocy is more responsible for the economic disaster coming on the world, than the idiocy about land supply and how it is the catalyst for systemic change in the behavior of markets for property, and every layer of monetary and macro-cyclical phenomena connected to them. We had a good few decades but we forgot why, in contrast to even non-economists like Henry Ford, Frank Lloyd Wright and Charles Booth, who praised the new conditions of housing markets mid century. Well-regarded land economists mid century, such as Wingo, Alonso, and Ratcliffe, all pretty much assume in their writing at the time, that what had happened to land rent and cyclical volatility, was self-evident. But in our age, we’re so decadent and post-enlightenment, we can put the whole beneficial process into reverse and then stand around gaping at each other saying “what went wrong?”, and “no-one saw this coming”…..

    • With respect, Phil, if Joye doesn’t understand ‘money’ he doesn’t really grasp the housing market. You can talk about land supply and all other fundamentals till the cows come home but fake money (credit) is where the action’s at.

      I suspect he doesn’t get that bit and that’s why he’ll come a cropper eventually.

      • Maybe he understands the interaction of these things in ways that appear contradictory to people who think they understand but don’t. I’ve got very little regard for the credibility of people who don’t get the land supply factor, period. If they don’t understand that, they are not worth listening to on anything. Going back years, we had long debates on this forum, and it clearly became obvious that there is a certain type of person with whom it is a waste of time arguing from the abundant evidence.

        • You’re falling into the ‘Peachy trap’: Demand > Supply = higher prices.

          As I’ve said a hundred times before, there is way more demand for Ferraris than there are sales of Ferraris. Why? Because they cost $500k. You can restrict land supply all you want but unless banks are able to produce limitless money out of thin air to buy over-priced property then no amount of land-banking will make a difference.

          If we operated under a ‘sound money system’ in this country home prices would be a small fraction of what they are today — land supply might have a small influence but that would pale next to the influence of ‘money’

          Never mind, most people don’t get the connection between our monetary system and prices.

          • SupernovaMEMBER

            Am pretty convinced that Australia’s over priced property market is slowly strangling the real economy as more income gets diverted to the fire sector instead of supporting the real economy. With China slowing and iron ore price in down trend, vested interests will resort (are resorting) to desperate measures to extend and pretend to extract every last naive prospective buyer into the property market, despite what its doing to the real economy. Monetary madness disconnected from the real economy as most bankers wouldn’t know how to read a business plan for a flourish shop, yet they understand comprehensive credit reporting for house mortgages.

    • Precisely. Being able to credit himself for making a prediction is also something he quite enjoys. Even though in one if his podcasts a little while back he mentioned that a client that asked if the RBA would do QE. Since then he has been agitating for it in conjunction with a couple of other analysts from Goldman Sachs.

      Not fighting either of these two:
      https://twitter.com/cjoye/status/1176347058195718144

      Long junk mortgages and bank hybrids.