The RBA and Treasurer go to town on LF Economics

Despite Philip Lowe only being governor of the RBA for a little over 2 months, a lot of fundamental shifts have taken place leaving the RBA exposed to significant scrutiny on its previous actions. Specifically, in the midst of irrational exuberance, tolerating too many Australian households to overstretch themselves by borrowing excessively to purchase real estate in such a low interest rate environment that the RBA created. And since Lowe’s appointment, the RBA has seemingly clamped down against the scrutiny of their fiscal approach and have even unleashed powers that don’t exist within their mandate.

As an example, within two weeks following my September op-ed for the Guardian, a denied Freedom of Information request and a Senate submission claiming the RBA has failed to warn borrowers despite being aware that banks are tampering the loan applications of some borrowers to make them look more creditworthy than what they really are, the RBA ‘coincidently’ cited that our macroeconomic research team at LF Economics (established in 2015) has asked the RBA too many questions since May 2011 and advised that it would cease to provide any communication and clarifications to any inquiries.

I of course complained to my local Member of Parliament who happens to be Treasurer Scott Morrison. After he consulted with the RBA and in response to our complaint asking if the RBA is allowed to cease communication in this way, Morrison’s agreed that LF Economics team members had asked the RBA too many questions since 2011. In a quite frankly incurious response for reasons unknown the Treasurer’s response went humorously as far to imply that LF Economics was also somehow ‘on-selling’ the RBA’s information.

From our end, you know you are pressing where it hurts when the RBA (A government funded entity) feels obliged to take the most unusual of tactics. Indeed a Treasurer responding, unfortunately, with hearsay.

 

Looking through the lens

I have been fortunate over time to receive a wealth of insightful messages from Aussies telling me their stories, challenges and views on how they see Australia as a nation progressing. One of those individuals (who asked that his name be withheld) was kind enough to allow me to post his message on my blog. Its definitely worth the read as this gentlemen probably explains my concerns on Australia’s progression better than myself. See below;

To Lindsay David

I have recently read you book ‘Australia: Boom to Bust’.  I thoroughly enjoyed it and found it very insightful and would like to thank you for taking the time to write it.  I am however amazed that I was not able to buy the book in Australia and had to order it from a UK supplier.

I would like to share with you my thoughts on Australia and its current economic state, in particular the property market. I would also be interested in your response and feedback.

 In 2015 my wife and I (together with our son, now 5 years old) sold our home in the inner city of Brisbane and moved to Melbourne.   

Our first motivation to sell, was we thought Brisbane was more expensive to live, insofar as day to day living expenses i.e. public transport, rates, amenities, food (groceries and eating out) and entertainment costs.  Although Brisbane housing prices were lower than Melbourne, we also thought there were more things to see and do in Melbourne.  We felt Brisbane started to have a franchised feel to it, everyone was trying to keep up with the Jones’ and family time was spent going to the nearest Westfield shopping centre for something to do, and to consume more things.

Our second motivation was that we/I started to become aware that there was a large property bubble, and in my opinion was becoming seriously unsustainable. So we have decided to rent in Melbourne, as the cost of rent for us is on par with Brisbane, with the added benefit of being able to live in Melbourne and immerse ourselves in its offerings for the time being.

Over recent months I have become increasingly concerned in relation to where Australia is headed and the Property Bubble.  Things seem to be getting worse not better, and there doesn’t seem to be an end in sight. The Government and banks seem content to let it continue and the Media just seem to add to the hysteria.

One of my issues is, I cannot find enough people to talk with, who share my opinion.  Let alone anyone being able to conceive that there IS an actual housing bubble and no one seems prepared to make financial plans.

It’s almost as if, most people are in a transfixed state!  As if the property market is the new Nirvana and everyone that owns property, is essentially a millionaire, sitting on their own mini bank with a money tree growing in the backyard.  Home owners are all just waiting for the price to go up.

I follow your comments in the media and agree with them 100%.

In Australia I feel the country has only two main income streams: mining and the property market.  With the four Big Banks, Government and the Media being the major power brokers behind them. the Government only seem concerned with what is the largest amount of money they can make in the shortest period of time, and the banks, only seem concerned in their overall forecasted net profit.  Neither seem to have any polices or reform for how to run the country, nor are they concerned about the Australian citizens.  The Media is clearly being controlled by people with a vested interest.

I feel it’s highly negligent for the Government, RBA and banks to allow the property prices to reach the staggering amounts they are currently.  Furthermore, allowing people to go into large amounts of debt and financial burden, is just reckless in my opinion.  All without having any other industries’ incomes to support the economy.

From speaking with people, there seems to be a benign trust, that the Government and banks know what they are doing and that the housing market is safe and the current prices are the norm.  There is a strong sentiment of “That’s just the way it is”. 

Almost on a daily basis now, there’s a news article about the Australian property market.  Most boast large value increases, booming property sales and high clearance rates. Very few talk about the negatives in a sum total, and when they do, it’s a very generalised statement i.e. mortgage stress, rates arrears or the ever favourite “First home buyers”.  

My concern is how high property prices are and how far into debt a person or family has to go, to live in a particular city (especially Brisbane, Sydney and Melbourne).  This is without taking into fact that people are spending large amounts of money to move into a particular school zone or, drawing back on their mortgage to purchase new cars, holidays or whatever else they desire.  I even spoke to one person who drew back on his mortgage to buy several guitars!

This is also without factoring in the current historic all-time low interest rates, as well as Chinese and other Asian foreign investment.

People just don’t seem to be aware of how much property is costing them and how much it’s going to cost them in the long term, especially when and if the property bubble bursts.

In the past the average property had an average cost ratio of 4 x 1.  This seemed to be a stable figure. Now it’s more like 8 x 1; or 10 x 1 and in some cases 12 x 1!  On top of this, when you factor in other costs such as health insurance, general insurance and other household bills such as mobile phone, cable TV, internet costs etc, I seriously wonder how people are affording their mortgage repayments, with after tax dollars and still have a surplus for disposable income.  Surely not everyone is an Executive working for a bank or Government?!

When I do the calculations based on today’s figures, most people would be financially better off living in a smaller township, with a house mortgage of $400k to $500k on smaller salaries, rather than living in the larger cities paying premium prices.

I am also astounded when Australia is compared to the global market, both in property prices and the amount of personal debt.  By comparison, in most cases, Australia is more expensive to live than New York.  This alone indicates there is something seriously wrong.  Australia has nowhere near the amount of people (per capita) nor the industries, job market etc, so why is it so expensive and what is the need for it to be so expensive?

I can’t understand why Australians on a whole aren’t concerned about this or think that it is acceptable?

When I look at Australia as a whole, in the past, Australia used to have a lot more focus on agricultural exports beef cattle, food etc.  Australian Government seems to have lost it way and forgotten the real reason the Government actually exists – to serve and manage society for the people.  Not to feed off the people and rob them blind.

I feel Australian Government and politics need to go back to basics and look at current world markets to  see what it can produce and align itself accordingly.  Not just dig up the earth and create its own overinflated markets and Ponzi schemes, including immigration.  Nor should Government be allowed to sell off land and natural assets to overseas corporations.

Australia should focus on technology, science, renewable energy, other food markets, children, education, farming water supply.

But which Politicians would have the courage to do this and go against the people that paid for their campaigns or forgo their large over inflated salaries for a mere 65 days’ work per year?

I am just not sure where Australia is headed nor its success.

A lot of the media articles mention a correction in the property market – not a total price drop, somewhere in the range of 10%.  However, I don’t understand what these figures are based on, when you still calculate the cost of living, mortgage rates and consider house prices have all but nearly doubled in the last decade.  I don’t see how a 10% reduction allows people a life and a lifestyle that Australia was once known for?

When I look at recent Government history in such events as the mining boom, they were happy to profit and sign trade agreements, but when it slowed down and the workers and township fell into economic despair, the Government have been no were in sight.

I liken it to a game of Monopoly, when you change the rules and take out all the pit falls such as ‘Don’t Pass GO!’ and ‘Go Back To Jail!’.  There’s only so many times you can go around the board collect $200 and have all your property developed with hotels.  Eventually there is no more money left and the game comes to a grinding halt.

Sorry for such a long rant, but it weighs heavily on my mind.  I am hoping you might be able to offer some further insight.  It feels like I am just sitting around waiting for the property market to burst, taking the Australian Economy with it.  The truth is – I feel like a doomsayer.

However, I do wish to move on and feel secure that I have made and am able to make good informed decisions for myself and my family.  But the truth is, I really feel like a puppet on the end of a string, held by the Australian banks and the Australian Government, who also have their other hand heavily pressed on the scales.  I do not trust them and strongly feel that a crisis is coming, but don’t know what to do about it.  I feel confident in interpreting the market, but am unsure of the when and how.  This may also be due to the Governments, banks and media doing a stellar job of keeping the real facts hidden.  But in any case I don’t not know what to do next !!!!!

Australia’s WTF moment.

A nation caught off-guard. 

I have always warned of the day that Australian banks would face when it came to the dangerous assumption that no matter what happens, the tap of international wholesale debt would always be running at full power. However following this months RBA decision to cut rates, the beans have officially been spilt, and Australians are a little confused at the moment.

First and foremost, this was the first time I can remember witnessing an interest rate cut where the prime response was for banks to raise term deposit rates to the incredible magnitude of 50-85bs (roughly 150bps above the reserve rate). It must also be noted that there is enough scrutiny to warrant an explanation from the RBA on whether it informed these banks prior to the rate decision of a pending rate cut. Because it normally takes a major institution (let alone four of them) weeks to make the necessary preparations to raise term deposit rates at such a scale when the reserve rate is about to be cut.

Why did the banks raise the interest rates on term deposits when the RBA cut rates?

Unfortunately there are several possible reasons as to why. None of those possible reasons can give Australians any comfort. Possible reasons include

  • The international wholesale lending community have no interest to lend money to Australian ADI’s at such a low rate, so banks have to source money elsewhere
  • There is a funding problem in general
  • There already is a funding problem with one of the major banks, hence raising the interest rate by 55-85bps for term deposits will attract more depositors to their banks (keeping money in the banking system) whilst banks tap cheap funding through the RBA bailout CLF (if they haven’t already).
  • Banks are starting to sustain or preparing for heavy losses from the WA, NT and QLD housing markets, hence are not able to pay back creditors without additional resources which would limit their liquid cash on hand and the ability to lend to homebuyers in other states in Australia the way they are.
  • For one reason or another about to be given heavy fines for mortgage fraud from a regulator other than ASIC or APRA, or that a Royal Commission is on its way which will crush the banks.
  • The banks don’t have the fiscal resources to lend to all the soon-to-be new apartment owners. Hence are batting down the hatched because if they cant lend like they are today in Sydney and Melbourne… the whole economy tanks.
  • Credit rating downgrades (rating agencies are a bit late to this party)

I warned about this… Sad to possibly see my biggest concerns possibly coming to fruition. Whatever the RBA does from now is irrelevant. Our focus now turns to how much money can banks raise to fund their ponzi financing schemes– by who– at what rate– and how much it will cost the Big Four to lend between one another. Last but not least, focus will also be on how much are these banks going to write down from the housing market.

Interesting times ahead.

 

 

Protection of the Australian sacred cow goes into overdrive

Government has gone into overdrive protecting the hidden truths of the Australian housing and finance sectors with clear indications that the 2015 House of Representatives Home Ownership Inquiry will not have a filed report for the Australian public and the 2016 Senate inquiry into Penalties for White Collar Crime looks like it may not go ahead as scheduled.

Furthermore, LF Economics has made assertive attempts under the Freedom of Information Act to attain certain documentation from government to better assist us in our research in understanding why highly paid (non-elected) government executives managing the fiscal affairs of this country refuse to enforce various laws in relation to mortgage fraud and loose lending standards by our banking system. All our requests under the Freedom of Information Act have been rejected, hence it is difficult for LF Economics to dive deeper and conduct further forensic examinations of the relationship between financial institutions, financial regulators and Canberra.

There is no doubt government, ASIC, RBA and APRA are hiding something from the Australian people. I think its fair Australian’s should have the right to investigate what it is they are hiding.

 

 

Back to the drawing board for Sydney

Sydney’s uber high cost of doing business relative to market opportunity, alongside its failure to persuade large foreign multinationals to use Sydney as its premiere business hub for the Asia Pacific regions suggests the NSW and Australian governments need to go back to the drawing board to figure out how to transform Sydney’s (and other Australian cities) attractiveness as not only a regional, but a global hub.

To be frank, Singapore and Hong Kong are crushing Sydney’s chances of becoming a real regional player. They too are expensive locales to do business, but talking to senior decision makers of large and complex global businesses, it is clear Sydney does not seem to be a preferred destination versus Singapore or Hong Kong. Citing high costs of doing business, distance from other major hubs and cultural challenges alongside an uncompetitive tax system and limited access to market versus rival hubs, it is clear that its now time for key government decision makers to figure out resourceful solutions to improve Australia’s talent base alongside figuring out a solution to make Australia a more tax friendly place to attract global talent.

At the end of the day it comes down to the availability of high caliber talent, productivity, profitability and tax. Imagine a large multinational trying to persuade their prime human capital to relocate to Sydney and pay +45% income tax?  Or imagine a new local tech startup seeking to attract expertise that does not exist in Australia as the RBA pushes for a weaker currency?

If Sydney is truly a global city, it should not have these serious problems period. The sooner there is a dramatic shift in the education system that pumps out talent like no tomorrow the sooner Australia can compete on the basis of human capital. Lets not forget, California and New York are high taxing locales, but they are able to attract the best the world has to offer when it comes to talent. This approach in itself would significantly increase Australia’s competitive landscape versus Sydney’s more successful rivals in Asia

There is no evidence of a nation going bankrupt because it spent too much on education (investing for the future). And the more educated our workforce is to fulfil the future roles the globe will demand, the greater the chance global businesses will choose Sydney or another major Australian city as its regional base. Until then, it could be a very hard grind. Especially for startups who we depend on reinventing our houses and holes economy.

 

You’ll never ever know if the media never ever show

Recent stats suggest the Northern Territory economy has entered a serious period of economic duress.NT BUSTRelative to the size of the greater Australian economy, the NT economy only makes up around 1% of total national GDP. However, it’s surprising that this economic disaster does not get a mention in the mainstream media.

With the election just a few days away, would be interesting to get an understanding from both side of politics on how they will address economic instability. Because based on action, the current approach by both parties is to ignore it. Hence, you know nothing about it.

Scomo’s War on Everyone with no Gray Hair

As the election campaign drags on and desperation slowly sets it, the gloves are slowly coming off with the LNP and Labor advocating they are the better economic manager than each other. Both parties present a slight shift in policy and objectively have a case to criticise their foe’s policy.

 I tend to take a neutral approach and don’t pick sides, especially in an election based on minimal reform; there are undeniable signals from both camps on their paltry approach to taxation and debt. In the backdrop to this election, it is important to note the costs of transferring significant sums of leveraged wealth to other Australians can be more costly to an individual versus any likely taxes ever paid down the line.

 At his press conference yesterday, Treasurer Scott Morrison retaliated against Labor’s apparent and pending invasion of the hip pocket of Australia with a cheap cardboard sheet seemingly pulled out of Colin Powell’s 1990 collection of Gulf War charts, citing Labor’s war on taxes (in large capitals) with HIGHER TAXES ON:

 –       SMALL BUSINESS

–       INVESTMENT

–       INCOME

–       HOUSING

–       ELECTRICITY

 If we take General Scomo’s military campaign against Labor’s proposals seriously, then the Coalition is claiming Australians will be worse off under a Labor government. It was suggested there will be no job creation because small businesses will not be able to afford new staff, less investment due to rising capital gains taxes, greater income taxes and rising electricity bills. Perhaps these things could occur.

 If we take General Scomo’s military campaign in the War against Labor’s higher taxes with objectivity, however, Scomo is not upfront on his underlying message that is transmitted: protectionism. Protectionism of the old and grey – and the younger generation is General Scomo’s enemy in the War on taxes.

 Labor’s alleged war on growth is seeking to level out the playing field in investment, primarily in relation to housing affordability, reducing speculators’ ability to outbid first home buyers. The latter group will undoubtedly struggle like no other generation in the post-WW2 period to create their own ‘real net wealth’ given the dire changes in the economy.

 The Liberal party is warning of ominous consequences to the economy if dwelling prices fall, making it difficult for the older generation and speculators to capture unearned and unrealised wealth from rising land prices. This is what the General Scomo military campaign is attempting to protect.

 When a young first-home buying Aussie does outbid their speculator tax-deducting foe, it is done so at an extraordinary cost to them. Every dollar that a young Australian has saved for a deposit alongside the gargantuan loan they must service benefits an older Australian for their retirement – an intergenerational wealth transfer.

 Think of it as a bank-sponsored generational tax where a young Australian is investing everything they have in an older Australian’s retirement through leverage. This is unlike other nations such as Germany or the US where the older generation invests capital in the new; just look at their entrepreneurial startup scene compared to ours.

 Australia’s approach is vastly different, by having the younger generation invest via debt to acquire older Australians’ property that will yield no new jobs for the nation but to secure another’s retirement at the lowest possible tax rate for the old.

 The older generations are fond of reminding the young that they faced very high mortgage interest rates back in the day. But they also had the benefit of both lower deposit and price to income ratios, one adult earner and high wage growth which reduced their relative debt burdens.

 Today’s younger generations are beset with two hardships: record-low wage growth amidst an income recession now 17 quarters long and sky-high housing prices. Without high levels of wage inflation to reduce massive debt burdens, it will become increasingly difficulty to muster up enough to invest in a new business or tech startup. The older generations don’t seem to invest in the young like the young invest in the old.

 From an objective point of view, it’s worth cautioning that when combined, taxes and generational wealth transfers come in different shapes and sizes. For General Scomo to win the war on taxes, he has to repeatedly slay the young to protect the older cohorts’ wealth by continually raising the barrier for entry to allow the next generation of young Australians to succeed. This economic model has been tried and tested numerous times – and has failed every time.

Warning to borrowers–ASIC protecting the control fraudsters.

ASIC has the backbone of a chicken wing when it comes to enforcing the rule of law; this is widely recognised in Australia and resulted in a Parliamentary inquiry. If any politician believes that ASIC is a ‘tough cop on the beat’ they should seriously reconsider their opinion on this issue.

 Under the pomp and ceremony of the government’s decision to levy the banks to fund ASIC’s prolonged $400 million+ annual fishing vacation is its pursuit of catching tadpoles in the open seas while leaving sharks and barracuda’s to freely roam. Unfortunately for the regulator, there is a new term Australians will become accustomed to.

 If you haven’t heard of the term control fraud before, you do now. It refers to fraud committed by the controllers of a corporation: executives and managers, typically a bank. It’s a crime that ASIC has decided neither to investigate nor prosecute, leaving borrowers on their own with no pennies to spare and nowhere to turn to.

 So here’s how a control fraud would work. Let’s say you’re an asset rich and income poor (ARIP) husband and wife in their 70s surviving off an income of less than $23,000 a year and own your $400,000 (today’s value) home outright. You want to obtain a $400,000 loan from the bank for an investment property that will run at an annual net loss. You walk into the bank branch for an appointment and are presented with 3-page pre-filled loan application form (LAF) stating only the basics details.

 During the application process, you honestly state your income and assets and are then issued with a 30-year interest-only loan you have absolutely no chance of servicing beyond a three to five year horizon. In other words, there is a strong chance that a few years later the only way you can get out of your loan is to sell your investment property at a higher net price than what you paid for it to extinguish your mortgage or go bankrupt.

 Firstly, this type of loan is predatory as it is far larger than what can be serviced by income and rent. There are laws and regulations in place preventing banks from engaging in this illegal activity which ASIC (including APRA) seemingly refuse to enforce, let alone impose penalties on such behavior.

 Secondly, and more importantly (from a criminal aspect) there are many cases where bankrupted borrowers realise they were not given a copy of their LAF at time of approval. They then phone the lender and demand their copy. The banks’ version differs significantly from the original application.

 On these LAFs, there is clear evidence of lenders tampering with their copy to show that a particular borrower was more credit-worthy then they actually were. In a nutshell, there is evidence of lenders inflating incomes and assets of borrowers to get mortgages approved. In many cases, signatures and initials of borrowers were forged; this is fraud.

 So when the old ARIP couple goes to ASIC after they ascertain the bank’s copy of the LAF (which now states they apparently earn $180,000 a year rather than $23,000) to report fraudulent activity and rightly asking for justice to be served, ASIC has an all too familiar response. Now broke, ASIC will inform you in a polite manner: “hire a lawyer as it is not ASIC’s problem”. In reality, this conduct is why ASIC was established, to protect Australians against white collar crime and enforce the law when it is broken.

 If you think this is a one-off instance, then how has Denise Brailey, Australia’s leading financial services consumer activist, managed to organise with more than two thousand victims of this mortgage control fraud along with their LAFs to prove they are victims of fraud? Yet, all of these accusations have been completely ignored by ASIC and other authorities when the evidence points to widespread control fraud.

 So why would a lender fudge their copy of a LAF to issue predatory jumbo loans? The answer is simple: it maximises revenues, share prices, profits, market share and executive remuneration. Furthermore, it keeps funding costs low via AAA ratings the ratings agencies provide. By using the fraudulent LAFs, the residential mortgage backed securities (RMBS) can be made to look secure. In reality, however, there is evidence to suggest these AAA rated RMBS contain lots of toxic subprime mortgages.

 We have seen this story before in the US. The only way to run up mortgage debt as historically and globally high as Australia’s is for lenders to commit control fraud. According to Brailey, this has been going on since the late 1990s. ASIC could’ve intervened to stop these practices a long time ago but have decided instead to side with the fraudsters.

 A Royal Commission into lenders would uncover a cesspit of control fraud, which is why vested interests adamantly oppose it. Typically it takes a bursting asset bubble for the fraud to be publicly revealed, but Australian banks are so fraudulent the criminality is seeping out everywhere. These control frauds have received wide publicity in the mass media, though the one to watch is the mortgage control fraud which is likely to be the nuclear bomb to our overleveraged and undercapitalized banking system.

 In the meantime, if you are currently seeking a loan, do not walk out without your full eleven-page copy of your LAF from the bank or broker, and do not sign anything without first obtaining legal and financial advice. And never sign blank forms!