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No BS: My hot take on the budget

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The shape of the country of Australia in the colours of its national australian dollar currency recessed into an isolated white surface

The Budget was massive, but I think we have more in store.

What do I make of this week’s budget?

It’s massive. But there’s more coming.

That’s what I reckon.

First up, the headline numbers are huge. We’re looking at a budget deficit of almost half a trillion dollars. We are still well and truly in unchartered territory here. No one could have ever imagined that the Australian government would be handing down that kind of deficit a year ago, let alone a “debt and deficits disaster” Coalition government.

But this is where we’re at.

It’s a huge amount of money.

But I still think there’s more coming.

And I say that because the two key centre-pieces of the budget – the wage subsidy for young workers, and the instant asset write-offs for business investment – are activity generated.

That is, they rely on the private sector doing stuff for them to come into effect.

So if you’re going to give companies a subsidy if they employed a 19-35 year old from the ranks of the unemployed, that requires firms to actual go out and hire people.

While this measure is estimated to be worth billions of dollars, it is theoretically possible that if no firms employed no new workers, that the total cost to the budget would be a doughnut $0.

Same story with the asset write down. If firms invest, there might be a certain tax advantage for that. But if no firms invest in no new things, then the measure is worthless.

That means that this free-spending budget actually needs a catalyst before it become active.

And what’s the catalyst?

Economic activity itself. It needs firms to hire and invest. If they don’t, then there’s nothing.

So this epic budget positions itself as a rocket pack strapped to the top of an economy that’s already moving.

But what if the economy isn’t moving?

It’s possible.

The government’s projections for growth and jobs were characteristically over-optimistic, but not wildly so.

But still, there’s a lot of money exiting the economy right now, as the governments front-line support measures – particularly JobKeeper and the JobSeeker supplement – are already being wound back.

This chart from the AFR shows you what the ‘fiscal cliff’ we’ve been hearing about for so long is now looking like:

And that’s at a time where private demand has already fallen through the floor, and public spending is the only thing propping up the economy.

And so what you’ve got is about $30 billion worth of direct government spending being replaced by a wage subsidy worth $4bn, and an asset write-down worth $27bn.

So it kinda balances out, right?

Well, no, not exactly.

It’s a bit apples and oranges because you’re replacing a direct cash injection, with indirect support that’s conditional on firms taking the risks involved in hiring and investing.

What it means is that if the economy is already recovering and continues to recover, and firms are happy to hire and invest, then we should get a reasonably smooth transition.

But if they don’t – if firms and households are still spooked – especially as JobKeeper winds up – they we might end up with a very bumpy transition.

In the short term, that will lead to two things. The first is that the government will decide it needs to support the economy more directly, and it will go back to mainlining money straight into the economy.

The second is that it will call in the RBA artillery, and we’ll get further rate cuts and reduced mortgage rates.

My guess is we’ll get both.

My hunch, based on what I know about animal spirits, is that everyone will want to take a wait-and-see approach, and the government we’ll be forced to intervene more aggressively.

In the long run, that means even more money finding it’s way into the system, and we’ll have an even bigger rebound boom baked into the outlook.

So that’s my take on the budget.

It’s huge. It’s massive.

And it’s only round one.

JG.

Aussies cop $24bn windfall

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When you look at how Aussie households are actually doing, you get a very surprising story…

Are Australian households actually building up a massive war-chest?

Are they about to unleash a surge of cash onto the asset markets?

Maybe.

WE’re getting pretty used to all the bad numbers. The scary numbers. The Australian Bureau of Statistics has numbers. Lots of numbers. Most of those numbers are scary.

Sad.

So sure, we’re hearing a lot about how stuffed the economy is.

But on the other side of that ledger sits the government.

And while Covid has torn a path of carnage through the economy, the government has also rushed in to try and patch that up with cash. Mountains and mountains of cash.

Happy.

And how is it all balancing out?

Pretty well actually. Australian households are actually in a better financial position than they were at the start of the crisis.

Wait, say what?

No seriously, that’s what the data says.

And look yes, some individual households are doing it tough. They’ve lost jobs or lost businesses, and they’re hurting. Absolutely no denying it.

But for every household that’s gone backwards, another has gone forward, and averaging it out over the entire population, you’ve got a net positive.

We’ve got a few data sources telling us this now.

First there’s analytics firm AlphaBeta:

Analysis of household cashflow by analytics firm AlphaBeta, a part of Accenture, shows the slump in wages suffered by households due to the pandemic (plus and the fall in unincorporated business income flowing to households) was more than offset by government payments, superannuation withdrawals and private sector hardship support between April and June.

It reveals a net increase in household cashflow of nearly $24 billion over that period.

Yep. You read that right. Aussie households have picked up a windfall $24 billion!

$24 billion! That’s not nothing. That’s a long way from nothing.

Happy.

The CBA are telling a similar story, based on the flows they’re monitoring into customer accounts. They reckon that on the back of government support programs and the early access to super, households are in a stronger financial position.

The income of the average household rose by 4.2% over the year to Q2 20, up from 2.4% over the previous year. Salaries have fallen due to coronavirus job losses. But investment income and government benefits have increased sharply. Investment income is capturing the early withdrawal of super which is part of the COVID-19 response

That investment income is a doozy, but remember it’s all about the super withdrawal.

Still, in aggregate and on average, households are substantially better off.

And at the same time, they’re spending less. Spending has fallen by around 9% over the year to Q2 2020.

So if they’re earning more and spending less, that must mean that households are saving more. That’s a good thing. That’s shoring up their long-term financial position.

So this is a story about households having more money.

It’s also a story about households putting that money aside for a rainy day.

But what if the rain never comes?

What if things get back to normal pretty quickly, and Aussie households just find themselves $24 billion better off?

Where does that money go then?

It goes into Jet skis obviously, and then into asset markets after that.

Boom.

JG

Is this wages boom too late to change the election?

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In six months, Morrison could have crushed it in. Shame the election is now.

So the election has been called. What’s going to be the deciding factor?

We like to think it’s about big-picture vision and value positions. It’s about the issues.

But it’s not. It’s the economy, stupid.

I don’t think Bill Clinton ever expected that that little quip would be one of the most lasting contributions of his “legacy”, but it is exactly right. People need to feel secure first and foremost. The economy has to be delivering real jobs and a decent standard of living.

If it’s not, everything else is a side-show.

And on that front, you’d have to think the economic tides are with Morrison.

And they are to a degree. The economy continues to perform reasonable well, especially on the most important metric that matters – employment.

Employment growth is easing, but it remains decent. And most importantly, the number of jobs is growing faster than out labour force population, and the unemployment rate continues to fall. 

At 5%, it’s a pretty decent outcome, all things considered. By itself, it’s certainly not a ‘turf them out’ type number.

But there are problems for Morrison that are hidden behind this headline number.

The first is that employment growth is uneven. Some sectors, especially the public sectors, are doing well. Others, particularly mining and construction, less so.

That patchiness can create ‘pockets of pain’ in the economy. It can create segments were unemployment is concentrated, and political venom starts to pool. Think the mining communities of Far North Queensland, for example. It’s not possible for a miner who’s lost his job in Townsville to just go and become and community care worker in inner-city Melbourne, for example.

The other headache for Morrison is that while people have jobs, wages growth has been… what’s the economic term? Piss poor.

Wages growth has been hobbling around 2%, which means that people probably feel they’re going backwards in real terms. Technically, it’s still outpacing inflation, but I think that’s probably only a technicality. Ask around and I don’t think people will tell you that they’re keeping pace with the cost of living – especially with energy prices becoming a real pain point.

So that’s a headache for Morrison. It’s something that can shift the electoral dial.

The real irony here though is that wages are actually starting to pick up. Take a look at the chart and you can see that yes, wages growth is relatively low by historical standards, but it has definitely ticked up in recent months.

And the NAB survey is showing that more and more firms are reporting difficulty finding suitable labour.

So wages pressures are building. We’re still six months to a year away from this feeling like things are really on the up and up for everybody, but it’s coming.

So Morrison must be spewing. If only the election could have been called six months later. He probably could have ridden a growing sense of optimism to victory.

But instead, people are still grumbly, There’s not a lot of gratitude in the community.

And if Morrison loses and Labor wins, they’ll enjoy a very sweet honey-moon period as wages continue to pick up and households enjoy the boost in confidence. Even though they’ll have done nothing to deserve it.

That’s just how the cards have landed. Tough break, ScoMo.

Is the credit crunch already over?

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The data says that APRA’s restrictions have done their job. Time to let the market run free again.

It’s looking to me like the credit crunch might be about to ease up.

Let’s remember how we got here. Right now, the national property market is in the midst of an orderly and mild consolidation.

And consolidations are expected. The property market moves in cycles, up and down.

Most times that’s driven by dynamics in the cycle itself. Left to it’s own devices, the property market, just like the broader economy, will run hot, then cool and then run hot again.

But that’s the thing. The property market wasn’t left to its own devices. Since 2016, APRA has been getting involved, creating limits, particularly on investor lending. It started with making sure lending to investors wasn’t growing too quickly, and then became about cutting back the pace of Interest Only (IO) lending.

This clamp down on IO lending was across the market, but was particularly focused on investors.

Predictably, as the credit taps were squeezed, price growth began to stall, and over the past year or so, prices actually started to come-off, little by little.

And that’s where we are today.

So obviously if we’re interested in finding out when the market is going to start growing again, then the first question is really, ‘when will APRA back off?’

This is a little hard to predict. One of the things that came out of the Royal Commission was that APRA – who is responsible for regulating the banks – seems to have been a bit asleep at the wheel.

Given the huge list of crimes, misdemeanours and affronts to human decency that emerged from the Royal Commission, you do really have to wonder what APRA were doing.

APRA has been made to look a little silly. But what worries me now is that they might over-compensate – try to play the tough wild west sheriff. And that might mean that conditions remain tougher for longer than they need to.

And the truth of it is that right now, I’m seeing a case for letting up on the restrictions.

Take a look at this chart here from the RBA. It shows what has happened to IO lending since the restrictions came in in 2016.

The orange lines – new lending – is the one to be watching here. As you can see, IO lending pretty much fell off a cliff when the restrictions came in, particularly to investors in the bottom panel there.

But what you see here is the banks very quickly bringing themselves into line.

And after the initial adjustment, things just sort of levelled out – the share of new lending has remained fairly constant in recent months.

If it remains constant, the share of outstanding lending – the blue line – will keep trending lower, and until it re-joins the orange line.

And the structural change in the market that APRA was looking to create, will be complete.

Mission accomplished.

The thing I would note is that once this transition has been made, then the normal cyclical dynamics should start to reassert themselves.

That is, even if the share of new lending remains at around 30%, after a year, that will be the new reality we’re working with – so our annual growth rates (which compare this month with the same month 12 months ago), there won’t be any impact left in there at all.

And so that should mean that we should see price growth should realign with the cyclical trend.

It is possible that these restrictions have caused the cycle to turn. There’s a good chance of that. So I don’t think we’ll see positive growth numbers this year or in the first half of next, but after that, I’d be looking for things to start moving again.

But I’d also be saying to APRA, since you’ve caused the cycle to turn, and you have done what you set out to do with IO lending, maybe it’s time to cut investors some slack.

We certainly don’t need any more restrictions. We don’t need no sheriff out there shooting from the hip.

Here’s hoping cool heads will prevail.

If Labor wins, buy this type of property

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I’m wondering what impact a Labor government might have on the market. I’m not the only one…

With Malcolm Turnbull actively campaigning against the Liberals in his old seat in Wentworth, and the coalition looking like it’s on the brink of implosion, I’ve been thinking about what a Labor government might mean for our property markets.

Turns out I’m not the only one – The annual Property Investment Professionals of Australia survey shows that a lot of investors are worried what impact Labor’s negative gearing and GCT reforms will have on the market:

Australian property investors are shrugging off finance issues, concerns about taxation policy changes, and the market slowdown in Sydney and Melbourne with a growing majority believing this year is a better time to invest than last, the 2018 Property Investment Professionals of Australia (PIPA) Property Investor Sentiment Survey has found.

The national survey, which gathered insights from 820 property investors, shows that more than 77% of respondents think now is a good time to invest in property, with 52% looking to purchase a property in the next six to 12 months.

However, more investors than last year (48% in 2018 versus 43% in 2017) say that changes to investor lending policies have impacted their ability to secure finance for an investment property.

Potential changes to negative gearing and Capital Gains Tax policies are also a growing concern, the survey found, with 45% of respondents indicating they would reconsider their future investment plans as a result of proposed changes.

While a majority of investors (64%) believe it’s unfair to charge investors higher interest rates compared to owner occupiers, most (61%) also indicate they will have no problem meeting higher interest rates when their loans switch to principal and interest repayments.

Even though the Sydney and Melbourne market slowdown has been widely reported, most investors appear unperturbed with almost 90% indicating that concerns about price falls in our two biggest capital cities will not slow down their investment plans.

Brisbane remains the hot favourite for investment, according to the survey, with 44% believing it was the capital city with the best investment prospects (up from 43% last year). About 26% picked Melbourne, down from 32% last year, while only 8% chose Sydney as having investment potential.

This all fits with one of the stylisations I have about the market – professional investors are generally well positioned to deal with rises in rates or anything like that. If anything, it’s amateur investors who are just blindly following the advice of their accountant – that’s who we need to worry about.

If you are self-identifying as a ‘professional investor’, then you are probably well covered.

The focus on Brisbane is interesting. Brisbane has been underperforming for a few years now, and I’m not convinced it’s about to dramatically turn all that around. So I’m perhaps not as bullish on Brisbane, but that might be because I’m not as bearish on Melbourne, or even Sydney.

There’s gems to be found wherever you look.

But it does seem clear that negative gearing reform is rearing its head as an issue.

So am I worried?

I would say I am ‘cautiously optimistic’.

I’m optimistic because I don’t see the reforms having a huge impact on the market, in and of themselves. But I’m cautious, because the market is facing a lot of headwinds at the moment, and a lot of them regulatory.

That’s the thing when you’re camel is fully laden. You just don’t know what’s going to be the straw that breaks its back.

I don’t think it will be negative gearing, but I also think Labor would be smart to wait and see what impact recent changes in the credit market have, before it goes and does anything it might regret.

The other thing to remember is that Labor’s proposal is to remove negative gearing on existing homes, but leave it in place for new builds.

That mean we might just simply see a shift in investor demand from existing to new construction.

Stockland CEO Mark Steinert sees the writing on the wall:

The Labor Party’s plan to limit negative gearing tax breaks to new housing would put a rocket under the business of residential developers because demand from investors would surge, Stockland chief executive Mark Steinert says…

“Our business will rip,” he said at the Property Council of Australia’s annual congress in Darwin.

“We’re all about new product. At the end of the day, half our buyers are first-time buyers, and 80 per cent of our buyers are owner-occupiers. If the investors are going to participate in the market like they have in the past, that means they’re all pointing at our product and other developers’ products”…

Good luck to him. He’s probably right.

And when you remember how busted our planning system is, you could see a surge in demand for new builds meet bottle-necked supply… and that means rising prices.

Hard to know how it will balance out, but it could mean that it could even be a net-positive!

I’m not sure. I’ll have to do a bit more thinking about how to balance those equations.

But I think that is how I’m thinking about it. Labor’s negative gearing reforms probably won’t have a huge impact on the market, with a reconstitution of demand price growth away from existing homes to new builds…

… provided Labor doesn’t fluff the timing.

We’ll see.

Trumps Hand In First Trillion Dollar Company

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Stock market valuations in the US and around the world have reached crazy levels. Does that mean we’re due for a crash, or could we actually go even higher?

I don’t know if you caught the news, but last month, Apple won the race to be the world’s first trillion dollar company.

Think about that for a sec. That’s a company worth 1,000 x 1,000 x a million dollars.

Serious cheese.

And it wasn’t like Apple was out on their own. There were a few companies in the peloton, and Amazon stuck a toe over the trillion dollar line itself earlier in the week.

Google, Microsoft, even Facebook seem like they’re within striking distance too.

The idea of a trillion dollar company is mind-blowing. That makes single companies, under the helm of single individuals more wealthy and more powerful than some entire continents.

(Antarctica, looking at you. You’re not pulling your weight.)

I mean, it makes Apple worth more than all but 15 countries.

But what’s going on here? Is this the sign of an economy on the ever upward on onward? Or is it just the next piece of evidence that the whole show is just bat-sh!t crazy?

What do you reckon?

It is true that the US share-market is on a bull-run. It’s having a good year when many major countries are not. Like China. Compare China and America’s stock markets since the start of the year:

America is pumping along. China is having a dog of a year. (Hey? Pun of the year, anyone? Anyone?)

That’s good news, right?

Well, yes, mostly. But some people worry that things are getting a little bubbly.

And there are some grounds for that concern. On a few measures, America is getting back to some previous-bubble highs.

Like, take the ratio of price to sales – the value of a company relative to its revenue, for example.

There’s two ways to look at it across the entire share market, (one straight, the other weighting companies by their capitalisation), but both are looking pretty bumper.

One has doubled since the GFC. The other is back to a peak not seen since the dot come bubble.

So… is that ominous? Or is it just what we would expect the market to be doing?

That’s a million dollar question right there. But for me, I think this is something that needs an explanation. If there’s not a good reason for it, then I think we should be worried. It might just look like the traders on Wall St were getting a little too high on the sugar otherwise.

But I think there is a good reason for it.

Trump.

Now hang on, hear me out. I’m not saying he’s a brilliant economic manager or anything like that.

But, what I am saying is that the policies he’s brought in – particularly the tax cuts and the tariffs on foreign production, are having real impact.

I don’t know if that’s an impact he was actually anticipating, but that doesn’t matter. It’s happening.

And what’s happening? This is:

That’s the amount of money being repatriated (brought back home) to America by American companies.

In just the first quarter of this year alone, American companies repatriated a massive $300 Billion.

That’s more money in a single quarter than in pretty much the previous seven years, COMBINED!

So money is rushing on home.

And what is going to happen to all that money? Some will go into share buy-backs probably, but much will be invested and turned into economic activity.

So this is some serious good news for the American stock market. And on that measure alone, not to mention a cyclical uplift that’s already so good that the Fed has raised rates seven times in the past couple of years – on that measure alone, I’d be expecting the stock market to be posting some very healthy results.

Which they are.

So I’m not seeing a bubble here… not yet.

And that probably means that the trillion dollar company is probably here to stay.

What a proud moment for humanity.

The value of a credible threat

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I was talking last week about how you’ve got to have a ‘credible threat’ in negotiations, otherwise you’re dead in the water.

If you’re in negotiation with someone, and you can’t create any realistic down-side, then you’re not really in negotiation. You’re in a position of asking… pretty please with a cherry on top.

You’re not in a position of power.

And so sometimes this means you’ve got to be a little tough – or at least play a bit tough.

But a threat alone isn’t enough. It has to be credible.

For example: “If you don’t come around and fix this bodgy plumbing job you did in my new bathroom, I’m going to open a portal from hell and set the hordes of darkness upon you.”

Threat: yes. Credible: No.

And so a lot of people balk at making threats because they don’t feel they can deliver one that is credible.

If you’re a total softy nice-guy, always bending over barrels to help people out, it’s difficult to turn around and deliver a threat that’s credible.

But there is always something available to you.

It reminds me of a story I love about a guy who was set upon by a bunch of thugs. It was late, there was no one around. There was 5 of them, just one of him. It was a hairy situation.

And this guy wasn’t Bruce Lee or Jean Claude Van Damn. A threat to open a can of whoop-ass was never going to be credible.

But he came up with a credible threat.

He picked out the guy who seemed to be the ring-leader – the top dog. Then he looked him square in the eye.

“There’s a lot of you and I’m not much of a fighter. I’m probably going to get hurt. I might even die. I’m ok with that. But I promise you this. If we fight, I swear I will tear your ear right off your head.”

Suddenly he had a threat that was credible. If you were in a brawl, and you didn’t care whether you lived or died, and you set yourself single-mindedly to nothing but tearing someone’s ear off, there’s a decent chance you would.

And suddenly, this gang had a downside. They would still win the fight. They always would. But now there was a reasonable chance that their top dog was going to lose an ear.

There aren’t many things in life worth sacrificing an ear for. Dutch post-impressionist painting maybe, but not much else.

And so the negotiation was flipped on its head. It was no longer this guy pleading for his life, relying on the humanity of the gang. Pretty please with a cherry on top.

Rather it was a threat to get beaten up vs. a threat to lose an ear.

The gang walked away.

But do you see what I mean? There is always a credible threat you can make.

Credibility in turn relies on your strength and weaknesses. It needs to be consistent with who you are as a person, and what you are and are not willing to do.

And you need to be willing to follow through. This guy really would have gone after that ear. The gang felt that.

But yeah, if you feel you’re lacking power in a negotiation, come back and look for your credible threat.

And go hard.

The giant awakens

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It was a strong GDP print last week… and the truth is even stronger.

I just wanted to pull out two things from last week’s GDP release.

First up, every quarter it rolls around, we’re reminded of our record-breaking run without a technical recession (two negative quarters in a row).

We’re now up to 26.5 years!

It’s pretty impressive.

Of course, to a lot of people, it means we’re doomed. The business cycle moves in… well… cycles. So what goes up must come down.

We’ve had it too good for too long. We’re due.

But this was a point Glenn Stevens made before he retired: just because we haven’t hit that arbitrary recession mark, it doesn’t mean that the business cycle is dead.

And if you look at the chart, we still get all the ups and downs of a regular economy. We just don’t stay negative for long.

And in part, that’s been about population growth, particularly through immigration. If you look at the per capita numbers, then we’ve had several recessions in the past twenty years.

So this whole “we’re due” argument… I’m not buying it.

The other thing that jumped out at me from the GDP release is the building pressure on wages.

One of the mysteries of recent years has been the wageless boom in profits – normally corporate profits and wages move hand in hand. Look at the chart below. The correlation is pretty tight.

But at the end of 2016, we saw company earnings pick up, while wages remained flat.

But now wages pressure is building. It looks like wages are catching up quickly, and they’re currently rising sharply.

Looks like we’re heading towards 5-6% per annum.

It could even be more since wages have been repressed for so long.

This could be just what Australia needs.

If you look at the last quarter of growth, it was driven by a surprising surge in exports, together with strong public spending.

Household consumption was unimpressive.

That’s been the theme for a while now.

The Australian economy needs to pass the baton over from the resources sector to the household sector. So far, households haven’t been willing to take it on.

But with more cash in their pocket, they just might be convinced.

The other thing, of course, is that higher wages will eventually feed through into higher rents.

Rental growth hasn’t been keeping pace with prices, and yields have been compressing.

Growing rents will reverse that compression, and once yields get back to normal – say around 4% nationally, then growing rents will feed through into growing prices.

And so as the household sector starts spending again, they will become the engine of house price growth.

And that’s not a moment too soon either. Largely, recent price growth has been driven by credit. But thanks to APRA and the Royal Commission, the credit channels seems to be running out of puff.

There’s a baton change needed there too.

So this is a story of a giant awakening. The Australian household sector is huge, and it’s too important to go on sitting on the sidelines.

It’s a good news story.

Bad News: Your money in the bank- gonski in 60 seconds.

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Another day, another banking attack on democracy.

Valentines Day will go down as a dark day in Australian history.

It was the day that the banks overturned one of the few protections that depositors had.

Ask anyone how safe their money in the bank is. I'd say 80% wouldn't have a clue. The banks are big. The money must be safe.

Another 20% are probably aware that Australia has a federally-funded deposit guarantee scheme.

So if a banks goes broke, and you had money in the bank, then the government will give you your money back, up to $250,000.

It's called the Financial Claims Scheme, or FCS.

(Not to be confused with the government's current public relations program, ‘ffs'.)

So all good, right? Your money's safe.

Well, turns out, it's not so safe. It turns out the FCS is underfunded, and not actually much of a guarantee at all.

In 2011, the international Financial Stability Board based in Basel, Switzerland, found that Australia's FCS contained about $20 billion for each bank in Australia.

Sounds like a lot right. Well, actually, no so much. Each of the four majors, who account for over 80% of all deposits, they each have something north of $400 billion in deposits.

So if one of the big four went under, the chances that there'd be enough in the kitty to cover it are pretty small.

Especially when you remember how concentrated the Australian banking sector is. It's hard to see a situation where a major goes under without taking some of the regional banks with them.

So not a lot to inspire confidence there.

But that's ok, the government could just go into debt or print money to make sure it hit its FCS obligations, right?

Well, maybe, maybe not.

And this is what happened on Valentines day.

The government sprung a sneaky move on the Senate, ramming legislation through while just 7 senators (of 76!) were in the room to vote on it.

(I guess the others were taking their chief of staffs out for a candle-lit dinner).

It was the APRA crisis resolution bill.

What's in the bill?

Well, a bunch of stuff, but the most alarming was the removal of the guarantee bit from the deposits guarantee scheme.

At this point I have to introduce you to Dr Wilson Sy. He was formerly the Head of Research at APRA, so knows what he's talking about.

As he says, “the evidence collected here strongly suggests that the Bill is designed to confiscate bank deposits to ‘bail in' insolvent banks to save the financial system.”

How?

“Or”.

There was key change to the APRA mandate. APRA is normally responsible for “protecting depositors AND ensuring the stability of the financial system.”

However, in the latest bill, APRA is allowed to make its decision in secret, if it is in “the interest of protecting depositors OR ensuring the stability of the financial system.”

See what they did there?

Now typically, protecting depositors is part and parcel of ensuring the stability of the financial system.

But in the middle of a crisis? When banks are going to the wall and the government is running out of money?

When it's facing the prospect of having to print billions and trash Australia's financial reputation?

It's not hard to imagine a scenario where protecting depositors is not the best way to ensure the stability of the financial system.

And since that decision will be made behind closed doors, it's also not hard to imagine a situation where government lackeys just decide to fleece donors and bail-out their banking mates, given the choice.

As Dr Sy points out, the new bill gives APRA and the government “discretion.”

But it's just not a guarantee if the body behind it has discretion.

It's like your insurer saying to you, yeah, your house and contents are totally insured… you know, unless something else comes up. Let's just see how it flows on the day.

And in the middle of a crisis, with a disaster to blame and their banking mates to protect, you can bet that the politicians will use their “discretion.”

And so that's what happened. On Valentine's Day, in the cold, heart of Canberra, the government quietly rushed through legislation designed to screw depositors over.

Thanks, mongrels.

I know the banking sector gives us things to be angry about on a daily basis, but if you're looking for a good outlet for that anger, the Citizen's Electoral Council is running a strong campaign on it. Check it out.

And time to rethink our definition of ‘defensive' assets.

Why the apartment crash is on hold

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Banks are running a closed shop

I've been warning my readers about the high-rise apartment sector for what… like 3 or 4 years now?

They're still standing… Is it time to admit that I'm wrong?

While I generally agree with the line that being wrong about the timing is the same as being wrong, I'm standing by what I said. In fact, if you followed my advice and steered clear of the high-rise sector in recent years, I expect a thank you card for Christmas.

And if things play out how they look like playing out, I expect you'll want to throw in a top-shelf bottle of whiskey to accompany that card.

So if things are as shaky as I've been saying, why haven't we seen more cracks starting to appear in the high-rise foundations? And apart from blacklisting a few suburbs here and there, why aren't banks back-pedaling harder on their exposure to the sector?

These are good questions. One of the old salty dogs of the Australian economic commentariat, Robert Gottliebsen had a crack at answering them the other day. I think the answers were interesting:

“Nowhere in Australia are there more danger signals than in inner city apartments. Most of the property commentaries look at average dwelling prices in particular cities, not at specific markets.

Broadly one and two bedroom apartments units sold on a “used” basis are down about 20 per cent in the three main markets – Sydney, Melbourne and Brisbane. Melbourne has a very serious problem in this market because a large number of the apartments have explosive high fire-risk cladding that must be replaced, which will either send builders and other industry players to the wall or will be paid for by owners who are risking their own or their tenants' personal safety each day. As this becomes understood the value of these apartments will fall by a lot more than 20 per cent.

Ok, hang on a sec. “Explosive” high fire-risk cladding? I've written about the cladding issue before, but I'm not aware of anyone saying that the cladding had the potential to “explode”. Maybe it was senior moment… Anyway:

Right now there are series of developers and apartment owners that in years gone by would have seen the bank heavies move in and take control.

But the banks are just sitting there watching the crisis unfold. Why? Here are five possible reasons and I give my rating out of 10 for each of the reasons.

Firstly the banks have changed their spots and are going to be soft in the future. Possible accuracy rated out of 10 – nil.

Secondly, the banks are scared about the impact on the total market if they pull the plugs. Rating – nine.

Thirdly, in Melbourne, taking control of fire risk apartments either by appointing receivers to builder/developers or taking control of individual apartments is extremely dangerous for banks. Stay low: Rating – nine

Fourth, the banks are worried about the royal commission and don't want bad headlines at this time. Rating – eight.

Finally, when interest rates are low banks are less likely to be vicious because the cost of allowing money to be frozen while the borrower tries to solve the problems is low. Rating, seven. But this will change if interest rates rise.

At some point the banks will have to confess their problems in this area and my guess is that the combination of higher global interest rates and the royal commission will force those confessions.

Maybe. I suspect to the only way to get the truth out of the banks is to pry it from their cold, dead hands.

However, on the idea that the banks are colluding to prop up a sector and to prevent the entire industry taking a bath… well, we've seen it before and it certainly wouldn't surprise me if that was the case.

I think the banks probably did get a little blind-sided by the king tide in foreign capital – a tide that came in quickly, and is quickly on the way out.

They don't want to be left holding the baby on that one, but they're stuck with it.

A managed unwind is actually probably the best we could hope for.

I think the next 12 months are going to be make-or-break. Developers and early buyers will be looking to off-load stock on a new generation of buyers.

But the only generation of buyers that's going to fall for that – or be dazzled by free i-pads, and interest free furniture packages – is a generation that is probably not going to be particularly savvy.

(They're not going to be readers of my blog, that's for sure.)

That also means that they're probably not going to be in a super-strong financial position. They're more likely to struggle with mortgage payments if the economy stumbles.

That is, the market is trying to hand-ball the baby on to a new bunch of suckers, and those suckers are the most likely to go down, fall hard, and go down en masse.

That wouldn't be fabulous for the economy.

So spread the word. Is grandma thinking of tipping her nest-egg into an off-the-plan apartment in inner-city Brisbane?

Get her to think twice.