Wednesday, September 23, 2009

US economic recovery - slow and painful

A year after the US financial markets went into a tailspin, the US economy is showing tentative signs of a weak recovery but jobless numbers are continuing to rise, though not at the terrifying rate of six months ago, when 600,000 people a month were joining the unemployment lines.

Something else is happening in America as well. The era of easy credit which fuelled two decades of spectacular growth is over. The American consumer has started saving. Mortgages, personal loans and even credit cards are harder to get. Consumer credit was down 5.2 per cent between April and June. Revolving credit, which includes credit cards, was down 9 per cent. As a result, the turbo-charged consumer market that has powered the American economy since the 1980s has run out of puff.

These developments are likely to define the trajectory of the US recovery - it will be slow and painful.

The US jobless rate rose to 9.7 per cent in August and is expected to peak above 10 per cent in the months ahead. It's already at that level in at least 15 US states and it could be five years before the national economy generates enough jobs to overcome those lost and to employ the new workers entering the labour force.

This fear of joblessness is likely to keep consumers' wallets in their pockets. Without a return to spending - retail sales make up 70 per cent of the US economy - it seems inevitable that the recovery will be slower than in the past.

Of course the pace of a US recovery will have implications for economies worldwide. The Chinese depend on the US as a destination for their manufacturing, and Australia sells China the commodities and energy to power their factories.

As a result we can expect the Reserve Bank to hold fire on rate rises this year despite the recent raft of reasonable economic data here. Even though Glenn Stevens and the RBA board will be itching to get rates back to more normal long term levels, they will be mindful of the precarious state of the global recovery.

The US Fed will be forced to keep rates at near zero levels for some time yet. Increasing rates in Australia will put upward pressure on our currency and endanger the recovery of exports. The Debt futures markets have already reduced their outlook for interest rate rises by half of one per cent, expecting the cash rate to be 4.5 per cent by September 2010 (down from their previous forecast of 5 percent). The cash rate in Australia is currently 3 per cent.

(Source: The Brisbane Times, 21 September 2009)

Sunday, September 20, 2009

US bank failures rise to 94 in 2009

Two more US banks have closed down, including the sixth largest bank bankruptcy this year, to bring the total number of bank failures this year to 94, according to the government banking insurer.

The Indiana-based Irwin Union Bank was shuttered with a total of $US2.7 billion ($A3 billion) in assets and total deposits of about $US2.1 billion ($A2.41 billion), the Federal Deposit Insurance Corporation (FDIC) said in a statement on Friday."

(source: Sydney Morning Herald)

Friday, September 18, 2009

Weekend at Bernie's

According to reports, Bernie Madoff's New York home, located on the beach at Montauk, with sweeping views of the Atlantic Ocean, has been sold for more than the asking price of $8.75 million.

While the property is under contract, the name of the buyer and the purchase price are not being disclosed "to protect the integrity of the sale," the U.S. Marshal's Office said in a statement.

Several buyers had submitted bids for the four-bedroom, three-bath, 3,000-square-foot home, which was on the market for two weeks. Sale proceeds will go toward reimbursing victims of Madoff's estimated $65 billion Ponzi scheme.

If you are in the market for real estate, Montauk is roughly 120 miles east of Manhattan on Long Island and is known for its many large summer homes owned by famous and wealthy people.

Note: wasn't to sure how to categorise this one, so I put it under "goal-setting"

(source: Reuters)

Monday, September 14, 2009

US house price crash - could it happen here?

The Australian dream of home ownership is slipping away, leaving a threat of a US-style collapse in house prices, according to a team of university researchers.

Analysis by researchers from South Australia's Flinders University has revealed home ownership in the 10 years from 1996 rose only 0.8 per cent despite strong economic growth and low interest rates in that period. The Flinders Institute for Housing, Urban and Regional Research analysis found home ownership fell by 15 per cent over the two decades to 2006 for low income earners over 45 years of age and medium-high income earners under 45 years.

Other findings included large gains in national income from the resources boom were "wasted" by increasing house prices and accumulating debt to unreasonable levels. The analysis found the first home owners scheme boosted home purchases for people under 25 years of age but many lower income earners in the 25-44 age bracket were unlikely to ever own their own homes because their parents were spending their inheritances and prices remained high.

Dr Joe Flood, the institute's adjunct professor, said the "the writing is on the wall for the 'Australian dream'."

"The country that promised limitless land, cheap housing and near universal home ownership to all comers now has the most expensive housing in the world amid very tight housing and land markets and little prospect of restoring the balance," Dr Flood said in a statement on Monday.

Dr Flood and his team assessed Census data to conclude that Australia's housing market is in "a very dangerous and unstable situation which has received little adverse attention". The researchers found that after 1996, average house prices increased by three times on average - to around 6.8 times medium household income - and debt levels surged.

"On the one hand Australia is vulnerable to a collapse like the United States, where prices fell by a half during the sub-prime collapse ... or to a long slow decline as in Japan since 1988," Dr Flood said.

(Source: Business Spectator)

Saturday, September 12, 2009

Americans continue to unload debt

Several economic reports this week showed data that shows a change in the way Americans and U.S. businesses are handling their finance as debt has continued to fall and business inventories are leaner.

The US Federal Reserve released the July consumer credit report. Data showed a $21.6 billion drop in consumer debt as both revolving and non-revolving facilities shrunk by more than 8 per cent compared to a year ago. This is the largest decline since records began in 1943. The decline in consumer credit came as a surprise to most economists who predicted a $4 billion drop in July following a $15.5 billion decline in June. Though consumer debt has fallen the past few months, total U.S. consumer debt still stands at $2.6 trillion.

While the lower debt levels are good for families and businesses on an individual level, collectively it will ultimately mean lower short run economic activity.

(source: All Headline News)

Friday, September 11, 2009

Banks may raise rates regardless of RBA

Variable mortgage rates offered by the banks might increase by around 10 to 15 basis points regardless of what the Reserve Bank (RBA) does between now and Christmas.

At a historical low of 3 per cent, the cash rate is at emergecy levels and will have to rise in time anyway. With some good economic data lately leading to improved business and consumer optimisim, sentiment on a rate rise has shifted to sooner rather thna later. However, the last few days has seen a fall in retails spending and home loan approvals that will be giving the Bank reason to reconsider any upward movement in rates before Christmas. Regardless of any pause by the RBA, variable home loan rates might increase anyway.

An important contributer to the cost of bank funding is the 'Bank Bill Swap Rate' - the cost of short term funds lent between banks. Over the last few weeks this rate has crept steadily higher. In the event the RBA does increase rates before Christmas the banks would almost certainly tack on an extra few points when the pass the increase to customers. If the RBA decides to hold, the major banks may just go it alone.

This is ironic because the knowledge of the potential for an adjustment by the banks will most likely add to the RBA's decision to keep rates on hold a little longer.

Thursday, September 10, 2009

US Consumer credit in retreat

US consumers are reducing their use of credit at a much higher rate than expected, casting doubt on recent hopes of a robust economic recovery.

Consumer credit, including credit cards, car, student and personal loans dropped at an annual pace of 10.4 per cent in July according to the US Federal Reserve. Economists say the data is an indication of bank write offs of bad debts, though consumers may also be using the higher savings created by reduced interest rates to pay down debt. Recent surveys suggest banks will maintain tight lending standards until at least the second half of 2010.

(Source: Australian Financial Review, 10 September 2009)

Tuesday, September 8, 2009

Money doesn't buy happiness. Happiness buys money

Arun Abey of IPac says the wealthiest and most contented people he knows were happy before they became rich. He says parents are better prioritising a love of learning and pursuit of passions in their children, rather than encouraging them into career paths based on income alone.

Aurn was interviewed by Richard Aedy on ABC Radio National's "Life Matters" program. Listen to what Arun has to say here.

Prime borrowers start to default - US

In the US, the long recession and rising joblessness are taking an increasing toll on the nation's most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.

This new trend signals more bad news for US banks. Rising delinquencies on prime mortgages helped drive the total delinquency rate to a record 9.24 per cent in the second quarter of this year, according to the Mortgage Bankers Association. The data reflect loans that are at least one payment past the due date.

The focus on prime borrowers comes more than two years after the housing meltdown took its first aim at subprime borrowers, who found themselves locked into unaffordable mortgages and weighed down by credit-card debt. These borrowers tend to have fewer financial levers to pull to stay ahead of their debt payments, so they default relatively quickly. Many of those bad subprime mortgages have already worked their way through the financial system, causing billions of dollars in losses to the nation's banks.

For prime borrowers, this recession has been especially tough because declining home prices have taken away one of the typical crutches for them, since it is harder to tap the equity in their homes to pay their bills if they lose their jobs.

In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings accounts, reducing contributions to retirement plans and turning to family members for money.

(Source: The Australian, from an article published in the Wall Street Journal)