Unemployment

The real reason Newsweek fired Kwong over Trump’s Thanksgiving

While Newsweek wants to sound magnanimous for firing Jessica Kwong over her article suggesting that Trump would probably just play golf and tweet over Thanksgiving she claims that the editors asked her to pen the story a week in advance. Pity the poor angel for not having access to Trump’s itinerary ahead of flying into a hot zone. CM guesses if her Twitter following was 706,200 instead of 7,062 she would still have a job at Newsweek.

Trump Derangement Syndrome (TDS) is rife in the mainstream media. So pitiful was Newsweek’s lame apology that it stuffed it down the bottom of the revised article. Kwong was mere cannon fodder so the magazine would look like it was taking proper action.

Assuming she doesn’t suffer from TDS, maybe Fox News or a conservative media outlet can snap her up. She claimed it was an honest mistake and to repost her original tweet with a picture of Trump in Afghanistan was at the very least eating a slice of humble pie. For that, she probably has more credibility than the entire editorial staff at Newsweek combined.

Queensland & unpublished data supplied by the Treasury

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Where is Queensland headed? CM was looking at data on the Queensland Treasury’s website and noticed the words “unpublished ABS trade data” which one assumes to be superior to “published ABS trade data.” Hopefully, the boffins at the ABS were happy for this to be released. It is amazing what one can find hidden away in government websites. The question is, do politicians ever bother to look at what drives the economy?

If Queensland politicians want to cut down on the 4-yr high jobless rate, fossil fuels have to be on the cards, regardless of the ideological position of the incumbent Labor government to pander to climate change activism. There is no escaping that coal, gas and minerals will be the mainstay of policy as they account for 80% of the output.

Since Labor Premier Anastasia Palaszczuk took office in 2015, Queensland’s unemployment has breached 6.5% in recent months, back toward levels when she started and the highest on the eastern seaboard. Gross State Product (GSP) has fallen from a 7-yr high of 4.2% annualised to 2.2% in the latest quarterly update.

CM on Sky

https://www.skynews.com.au/details/_6102427118001

CM appeared on Sky News to discuss the situation with our banks, the potential risks from the recommendations of the Hayne Royal Commission and the issue of mortgage stress.

Westpac reported a 40% increase in home repossessions

Mortgages Westpac

Don’t get CM wrong – this is still the law of small numbers.  Westpac reported this week that it repossessed another 162 properties in the latest fiscal year.  That is a 40% increase. While it is but a dribble compared to the 100,000s of total loans outstanding it is none-the-less a harbinger of things to come. Westpac made clear, “the main driver of the increase has been the softening economic conditions and low wages growth.”

The current status of 90-day+ delinquencies has been rising over time. As have 30-day +. While nothing alarming, the current economic backdrop should give absolutely no confidence that an improvement in conditions is around the corner. We are not at the beginning of the end, but at the end of the beginning.

Former President Ronald Reagan once said of the three phases of government, “if it moves, tax it. If it keeps moving regulate it. If it stops moving, subsidize it.” How is that relevant to the banks?

We have already had the government fold and attach a special bank tax on the Big 4. Phase 1 done. Now we are in the middle of phase 2 which is where knee-jerk responses to the Hayne Banking Royal Commission (HBRC) where banks will be on the hook for the loans they make. That is a recipe for disaster that could bring on phase 3 – bailouts.

Sound extreme? How is a bank supposed to make a proper risk assessment of a customer’s employability in years to come? Can they predict with any degree of accuracy on the stability of candidates who come for loans? The only outcome is to cut the loan amount to such conservative levels that the underlying purpose gets diluted in the process and prospective home buyers have to lower expectations. Not many banks will look positively at taking several loans on the same property with different institutions. That won’t work. SO loan growth will shrink, putting pressure on the property market.

What is the flip side? Given property prices in Sydney hover at 13x income (by the way, Tokyo Metro was 15x income at the peak of its property bubble), restrictions on further lending against loan books that are on average 63% stuffed with mortgages (Japan was 41.2% at the peak) won’t be helpful. A property slowdown is the last thing mortgage holders and banks need.

While equity continues to rise at Aussie banks, the equity to outstanding mortgages has gone down since 2007 i.e. leverage is up. If banks saw their average property portfolios drop by more than 20% many would be staring at a negative equity scenario. Yet, it won’t be just mortgage owners that we need to worry about. Business loans could well go pear-shaped as the onset of higher unemployment could see a sharp increase in delinquencies through a business slowdown. A concertina effect occurs. More people lose their job and a vicious circle ensues. It isn’t rocket science.

Of course, Australia possesses the ‘boy who cried wolf‘ mentality over the housing market. Yet it is exactly this type of complacency that paves a dangerous path to poor policy prescriptions.

In Japan’s property bubble aftermath, 40% of the value of loans went bang. 17% of GDP. $1.1 trillion went up in smoke. It took more than 10 years to clean up the mess and the aftershocks remain. Accounting trickery around the real value of loans on the balance sheet can hide the problems for a period but revenue tends to unravel such tales. 181 banks and building societies went bust. The rest were forced into mergers, received bailouts or were nationalised. Now the Japanese government is a perpetual debt slave, having to raise $400bn per annum in debt just to fill the portion of the $1 trillion budget that tax collections can’t fill.

The problem  Japan’s banks faced was simple.  If a neighbour’s $2m home was repossessed through mortgage stress and the bank fire sold it for $1.4m, the bank needed to mark to market the value of the loan portfolio for that area by similar amounts. In doing so, a once healthy balance sheet started to look anything but. Extrapolate that across multiple suburbs and things look nauseating quickly.

This is where Aussie banks are headed. This time there is no China to save us like in 2009. Unemployment rates in Australia never went above 6% after the GFC in 2008/9, unlike the US which went to 10%. We weathered that storm thanks to a monster surplus left by the Howard government, which we no longer have.

Sadly China has had 18 months of consecutive double-digit car sales decline. Two regional Chinese banks have folded in the last 3-4 months. China isn’t a saviour.

Nor is the US. While the S&P500 might celebrate new highs, aggregate corporate profitability hasn’t risen since 2012. The market has been fuelled by debt-driven buybacks. We now have 50% of US corporates rated BBB because of the distortions created by crazed central bank monetary policy, up from 30%. Parker Hannifin’s latest order book shows that customer activity is falling at a faster pace.

Nor is Europe. German industrial production is at 10-year lows. The prospects for any EU recovery is looking glib. Risk mispricing is insane with Greek bond spreads only 1.8% higher than German bunds.

What this means is that 28 years of unfettered economic growth in Australia is coming to an end and the excesses built in an economy that believes its own BS is going to leave a lot of people naked when the tide goes out.

The Australian government needs to focus on more deregulation, tax and structural reforms. Our record-high energy prices, ridiculous labour costs and overbearing red-tape are absolutely none of the ingredients that will help us in a downturn. We need to be competitive and we simply aren’t. Virtue signalling won’t help voters when the whole edifice crumbles.

All a low-interest rate environment has done is pull forward consumption. It seems the RBA only possesses a hammer in the tool kit which is why it treats everything as a nail. It is time to come to terms with the fact that further cuts to the official cash rate and the prospect of QE will do nothing to ward off the inevitable.

Pain is coming, but the prospects of an orderly exit are so far off the mark they are in another postcode. Roll your eyes at the stress tests. Stress tests are put together on the presumption that all of the stars align. Sadly, in times of panic, human nature causes knee-jerk responses which put even more pressure.

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The Aussie banks have passed their best period. While short term news flow, such as a China trade deal, might give a short term boost, the structural time bomb sits on the balance sheet and while we may not get a carbon copy of the Japanese crisis, our Big 4 should start to look far more like the rest of the global banks – truly sick. The HBRC will see that it becomes way worse than it ever needed to be.

Complacency kills.

Did the Big Mac find himself between the wrong buns?

As the old adage goes, “Don’t dip the pen in the company ink.”

McDonalds’ CEO Steve Easterbrook has been let go as the company CEO after it was discovered he was having a consensual relationship with another employee. Apparently, he violated company policy of executives dating subordinates. Easterbrook was a recently divorced man. Rules are rules, but do two consenting adults deserve to be punished by what they decide to do in their private lives? Far more elegant ways of dealing with such issues rather. Perhaps get his partner’s opinion? Will she be sacked?

What of the statistics?

According to Forbes,

“58% of employees have engaged in a romantic relationship with a colleague. A surprising 72% of those over 50 years old have been romantically involved with a coworker.”

“Almost half (41%) of employees don’t know their company’s policy regarding office romances.”

“Although 19% of employees admitted to stepping out on their partner with a colleague at work, a surprising 44% of employees have known colleagues who had affairs at work or on business trips.”

“most of those employees (64%) who had participated in an office romance kept it secret, and only 16% were comfortable enough to tell everyone including their superiors about their relationship.”

“18% of employees reported that they had a random hookup with a coworker.”

“Almost three in four (72%) would participate in an office romance again if given the chance.”

No doubt Maccas was looking to ensure it made a stand against possible #metoo cases against it. Best just ban it in its view…

The flip side was a recent survey since the #metoo movement that found,

This is what happened when feminist activism hit the workplace. It had the opposite of the intended effect.

Leanin.org has found in a survey it conducted that since the #MeToo movement took hold, 60% of male managers said they are now uncomfortable interacting with women at work – up 32% from 2018. Workplace interactions that men have become nervous about include mentoring, socializing and having one-on-one meetings with women.

Senior men who were also surveyed were 9x more likely to hesitate to travel with a woman and 6x less likely to have a work dinner with women.

Lean In’s founder and Facebook’s chief operating officer, Sheryl Sandburg said,

The problem is that even before this, women – and especially women of colour – do not get the same amount of mentoring as men, which means we’re not getting an equal seat at the table, and, you know, it’s not enough to not harass us. You need to not ignore us either.

Men are not ignoring you. Sadly when men can (and have) lose (lost) careers for unsubstantiated claims against them by women forgive them if they feel intimidated.

Who could have predicted this? Now it is men’s fault for not reading feminist minds on how they must act. Sandberg has an answer for that too,

“If there’s a man out there who doesn’t want to have a work dinner with a woman, my message is simple: Don’t have one with a man. Group lunches for everyone. Make it explicit, make it thoughtful, make it equal…Men need to step up. We need to redefine what it means to be a good guy at work.”

Maybe just let adults be adults instead of nanny-state intervention? How many people do you know that have ended up in a committed relationship from a workplace encounter? Bill Gates married one of his execs. Should he be retroactively punished for his galavanting with Melinda?

Recall the AFL bosses sacked for consensual affairs with staff. Not one of the parties every claimed there was harassment or any coercion.

Now Queensland Premier Anastacia Palasczcuk is demanding her ministers don’t drink at official functions. Seriously? Take serial offenders aside and address any poor behaviour but stop the nonsense about treating all of the adults like pre-pubescent kids.

Time for society to grow up and drop the control freakery of individual privacy.

Seen this all before

What is it with the US auto market that throws up so many canaries in the coal mine? Several years back CM wrote about the growth in sub-prime auto loans. What triggered this boom? Easier access to finance? That was one reason. As it happens the largest factor was driven by the ability for finance companies to shut down a vehicle by remote and repossess the vehicle should the buyer be unable to afford the monthly payments. This lowered risk and allows these long-dated loan products to thrive. Average subprime auto loans carry 10% p.a. interest rates. More than 6 million American consumers are at least 90 days late on their car loan repayments, according to the Federal Reserve Bank of New York.

About a 1/3rd of all US auto loans issued today are stretched out to seven years and beyond, according to the WSJ. A decade ago, the seven-year loan only made up about 10% of all loans. Even 10% of 2010 model year bangers are being bought on 84-month term loans.

After the tech bubble collapsed at the turn of the century do you remember the ‘Keep America Rolling’ programme, which was all about free financing for five years? While sales were helped along nicely, the reality was it stored up pain. As new car sales became harder to achieve, new financial products offered sweeter upfront incentives and buyback guarantees (because cheap finance was everywhere and not a differentiator) helped keep the fire stoked.

However, as front end incentives kept getting juicier, the cars on guaranteed buybacks were starting to return to the market at prices well below the ‘guarantee’ leaving automotive finance arms in a whole world of hurt and huge losses. Goldberg & Hegde’s Residual Value Risk and Insurance study in 2009 suggested on average 92% of cars returned to leasing companies recorded losses on return of up to 12%. Any company can guarantee the price of its used product, in theory, the question is whether used car buyers will be willing to pay for it.

In the last decade, auto loans have ballooned from $740bn to $1.3 trillion. Auto dealers are now making a majority of their money on the finance deal as opposed to the sale of the actual car. Even worse, the US car market is experiencing a third of trade-ins in negative equity meaning the gap is being added to the price of the new car, hence the push out of the loan period to keep a lid on the size of monthly payments. This was 17% in 2008.

CM is sure there is nothing to worry about. It is consistent with nearly everything else that has occurred in finance since the GFC. Just double down, spend more, close your eyes and hope nothing bad happens. Ultimately it will be someone else’s problem.

Serious auto-loan delinquencies – 90 days or more past due – in 2Q 2019, jumped 47 basis points year-over-year to 4.64% of all outstanding auto loans and leases, according to New York Fed. This is equivalent to the delinquency rate in Q3 2009, just months after GM and Chrysler had filed for Chapter 11 bankruptcy. The 47-basis-point jump in the delinquency rate was the largest year-over-year jump since Q1 2010. Actual outstanding delinquent 90 day + delinquencies stand at $60bn in 2Q 2019, almost double the amount of 4Q 2010.

Did CM mention gold?

Titanic shipbuilder manages to stay afloat

It seems that Titanic shipbuilder, Harland & Wolff, has been thrown a £6m lifeline after the Belfast based business looked to sink into receivership. The company has 79 staff, well down on the historic peak of 35,000. The trends are only too self-evident.

The OECD notes “As of March 2018, the global order book of registered ships totalling approximately 78 million CGT, thus continuing to remain at historically very low levels. In year-on-year (y-o-y) terms this represents a decline of around 10% and is almost 66% lower than the peak in September 2008.  The order book continuously declined after 2008 before stabilising in 2013 and staying above 120 million CGT throughout 2014. With deliveries stable and new contracting at record lows, the order book again decreased substantially in 2016, declining by around ¼ from January 2016 to January 2018. In the course of 2018, new ordering picked up again from its lows, but declined in the first quarter of 2018.

It wasn’t so many years ago that Korea’s largest container transporter Hanjin Shipping declared bankruptcy.  The above chart shows the daily shipping rates for the industry which remain tepid for the past decade. The problem with the shipping industry is the fleet. Ships are not built overnight. Surging order books and limited capacity meant that as the pre-GFC global trade boom was taking place, many shipping companies were paying over the odds without cost ceilings on major raw material inputs (like steel). This meant that ships were arriving at customer docks well after the cycle had peaked at prices that were 3x market prices because of the inflated materials.

H&W may live to see another day, but the consolidation in the shipping industry will be ongoing. P.22 of this report shows the slowing $ value of trade in recent months.