Banks Could Face Larger Asset Writedowns and Losses than IMF has Modelled
Financial institutions short-term external debt (on a residual maturity basis) is estimated by staff at about $A 400 billion (35 percent of GDP) in March 2009.”
Maybe the short-term external debt levels have improved in the last six months. “The risk is that we are planting the seeds of the next financial crisis.”
With the S&P up nearly 65% since touching 666 in March (seriously), we’d say the seeds are already bearing fruit. But all the Feds will succeed in doing is blowing up the balance sheet of the U.S. And of course speculators have tried for years to find a way to position themselves for an appreciation in China’s currency. It’s not going anywhere. Mind you we still think the short-term move is a dollar rally and some profit-taking on the dollar carry trade. This brings us to the second risk worth mentioning. Brazil is considering a tax on capital flows into the country in order to prevent investors from speculating on a further rise in its currency by buying Brazilian assets. The truth is that creditors already do know this. This isn’t as high as some leverage ratios in the U.S. The Aussie banks had to tighten up to prepare for losses on overseas assets. We’ll keep you posted. If American banks again blow up on the destruction of their remaining collateral (mortgage loans and U.S. You can see the program for it here. And there are two further risks worth mentioning. But that’s an even bigger problem than we can address today. dollar carry trade. That is, the IMF stress-tested Aussie banks for losses on their two largest loan portfolios - corporate loans and mortgages. But by taking on this massive liability - not that it doesn’t already have its hands full - the Fed is further consigning the dollar to the scrapheap of history. Do you think foreign creditors will not realise that the U.S. No one is worried about that at the moment. The Aussie dollar is being inflated by the U.S. Australia’s currency has already done so. Source: Federal Reserve Bank of San Francisco
The Fed supports this market by purchasing the securitised mortgages issued by Fannie and Freddie. But no matter how you slice it, the U.S. And what happens if it comes home to roost? And what about our theory that a U.S. government in spectacular fashion. Some other country is going to have to consume what the world produces. You know, all those mortgage backed securities and subprime loans? Will they not notice that the U.S. This is how the credit crisis was transmitted from America’s housing market to Australia’s economy. Demand for those securities may go up with a U.S. But in simple terms, it means a lot of domestic lending is funding from external funding, borrowing abroad to loan at home. The IMF concluded the banks were adequately capitalised to survive the shocks it tested for, but that, “The above shocks do not constitute a rigorous stress test and the results are only indicative of the health of the banking sector.”
If we’ve learned one thing in the last two years, it’s that bankers and analysts have consistently underestimated the frequency and magnitude of systemic shocks. Today, there is a banking story to cover. But he also knows that Aussie markets (and capital flows) are still massively affected by what’s going on in America. A few billion in bad debts and loan losses won’t wipe out that amount of equity. Don’t worry though. But this is going to have to wait at least another day. But you should contact conference organiser Marcus Matthews today. Well have a look at the chart again. dollar rally and a reversal of the dollar carry trade. But it’s fully consistent with previous bear market rallies. But maybe it’s poisoned fruit. A bank facing bigger loan losses takes fewer risks. Net profit fell from $4.54 billion to $2.56 billion. Yesterday we promised to show you how the funding model for the fiscal welfare state is blowing up. With $654 billion in assets and $616 billion in liabilities, the bank is sitting on $37.8 in equity. See the chart below. But hey! You can reach him via email at feketeaustralia@gmail.com. Next time around, though, we reckon the losses - when they come - will be on domestic real estate assets. “China reported a 190% jump in overseas investment by its companies for the third quarter.”
“Policymakers might be encouraging Chinese firms to invest abroad, in part to help counter pressure for the nation’s currency,” the article continued. government. We haven’t checked yet. But it’s worth noting that NAB’s total assets are 17.3x times equity. With the banks unable or unwilling to lend, Uncle Sam has become the sugar daddy of the U.S. Treasury bonds? dollar rally will trigger a correction in gold, oil, and stock markets and lead to a mini-rally in U.S. But even if bank asset quality doesn’t crash (housing prices don’t crash), an external shock affects Aussie bank liabilities. And with so much exposure to domestic real estate (mortgage loans), the assets could face a world of hurt. There IS one notable difference between 2008 and today, though. And there is a high correlation between the direction of the dollar and the direction of gold, oil and stocks. Treasury bonds) we’d predict another ice age in global credit markets. China’s capital markets are not friendly in this regard, although Hong Kong stocks remain a popular option. With the trend still strongly down we can expect to see either a false break of the lows around 71 reached last year or if that doesn’t occur then a crossover of the 10 week/35 week moving average to confirm that the trend has changed. The IMF report says that, “On the liabilities side, however, banks had sizable short-term external debt obligations, and access to offshore wholesale markets was disrupted by the Lehman Brothers collapse in September 2008.” Of course the government’s wholesale funding guarantee eased the pain of this shock, which is one reason why that guarantee may become permanent in all but name. But where did the previous smelly houseguest go? There are only a few instances over that whole time period where this indicator gave a false signal.”
US Dollar index - Trend is still down
Click to enlarge
“Therefore,” Murray continues, “we should be keeping an eye on this indicator going forward to tell us whether the US Dollar index has turned back up and is ready for a counter trend rally. But in the longer-term, we think the banks have invited another toxic house guest on to the balance sheet. The fact that countries like Australia, China, and Brazil are trying to limit currency appreciation versus the greenback shows you how unbalanced the world economy still is, how unprepared it is for the reality that America’s deleveraging will take place for years. Today’s Australian Financial Review reports that overseas Chinese investment is “surging.” Chinese policy makers are trying to trade dollars for tangible assets or equity in resource shares as quickly as possible. But the IMF wrote that, “A key remaining vulnerability is the roll-over risk associated with sizable short-term external debt. Yesterday we mentioned that U.S. In the interim, the U.S. And if you’re there on Sunday, be sure to say hello. That doesn’t mean the IMF conclusions aren’t to be trusted. It will continue to do so as a political imperative. just prior to the banking crisis in 2008. But it means in the event of another more severe shock, the banks could face larger asset writedowns and losses than the IMF has modelled. Source of New Mortgage Loans in the U.S. But the bad and doubtful debts charge for the year grew by 53% from $2.49 billion to $3.82 billion. is printing money to do this? dollar could appreciate in the coming years. Banks’ wholesale funding (domestic and offshore) accounts for about 50 percent of total funding, of which about 60 percent is offshore. And what will happen to the dollar then? But the lingering effects of the last one are still with us. You know what we think. The Congress funds the agencies which make the loans available. Households and businesses must save and repair balance sheets. It is the stupidity of Keynesianism to support aggregate demand when what everyone needs is a correction and a recovery. Sunday is the free Gold Investment Day for the Gold Standard Institute’s conference this weekend in Canberra. We asked Slipstream Trader Murray Dawes what he sees when looking at the U.S. Dan Denning
for The Daily Reckoning Australia
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How Did Australia Get Caught Up Losing Money in Commercial U.S. After all, the rally has been worldwide and extremely impressive by historical standards. Bond fund king Bill Gross agrees. Needless to say, as a capital importer, this would put Australia in an awfully uncomfortable spot. Notice the false breaks that keep occurring when the all time lows get breached (denoted by the numbers 1,2,3). Doom himself, analyst Nouriel Roubini, called the present market “The mother of all carry trades.” “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals,” Roubini said via satellite to a conference in Cape Town, South Africa. National Australia Bank reported a 43% fall in net profit yesterday. Before we launch in today’s instalment of the Daily Reckoning, let us quickly correct an error. In the bigger picture, this means the investment needs of the economy can’t be met by household savings alone. “The US Dollar has taken over the Yens role of funding the carry trade and this will be the situation for as long as the Fed remains too scared to raise rates, which seems to be for the foreseeable future. government will increase deficit spending to make up the difference. Ouch. dollar index. Go gold. What nobody yet knows is if it IS a bear market rally…or a garden variety stock market rally that precedes a recovery in the economy. Trading the move before either of these are confirmed would be jumping the gun.”
Murray is tracking which Aussie stocks will move if and when we see the dollar index break out. mortgage market. is now being backed directly by the U.S. Treasury notes and bonds. Real Estate? And gold? First, as the IMF paper on Aussie banks concluded earlier this year, Aussie banks are probably strong enough to withstand a normal shock to the balance sheet. It reduces lending. is borrowing money to keep house prices elevated? Don’t feel too bad for NAB. Where does that risk now reside? So we won’t! According to this report by the San Francisco Federal Reserve, over 95% of all new residential mortgage lending in the U.S. That’s the day your editor will be speaking about “Five monetary events to watch for in the next five years.”
If you want to attend the presentations and discussions over the next four days, you can still do so. If anything, it’s happened faster. Murray wrote that, “If we look at this chart of the US Dollar index going back to 1985, you can see quite clearly that the 10 week moving average crossing over the 35 week moving average has been a very good indicator of the trend. But it’s not far off where NAB was at the time. More cow bell! You recall that yesterday we were worried about the next banking crisis. The short US Dollar trade is getting pretty full, as I have mentioned in the past. Writing on Pimco’s website, Gross concedes, “Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets — while still continuously supported by Fed and Treasury policy makers — is likely at its pinnacle.”
Dr. So we can probably expect the dollar to weaken further over the long term, but a counter trend rally (short squeeze) may be closer than people think and this would lead to weakness in commodities and stocks. government is supporting the housing market. “When should we trade this move? Murray spends most of his time finding trading opportunities in Aussie stocks. banks have loaded up on a whole other kind of super-dodgy collateral; U.S. “Investors are betting on the yuan to appreciate as China’s growth accelerates from its weakest pace in a year.”
Most currencies that are not the U.S. It’s a shame that the strong Aussie is going to devastate local industry and manufacturing with higher costs, but at least it obscures for now the risk that Aussie banks are reliant on foreign borrowing.