The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Thursday, September 2, 2010

Boy there a lot of hedge funds out there looking to short Aussie banks...

As you might be able to discern from the presentation I linked to here, there are a large number of high-profile bears out there looking to short the major banks on the basis of their housing exposures. This arguably presents a little bit of a "system risk", which I am sure APRA and the RBA are thinking about. In my humble opinion, the empirical and factual bases for the hedge funds’ arguments are very weak, and, in many cases, quite erroneous.

And so it would seem that the major banks have found an unlikely ally in the form of yours truly. Sitting here in Singapore on my way to Hong Kong I feel like I am being compelled to wage a one-man war against the sensationalist housing hyperbole in order to resist the barbarian hoards seeking to overrun Australia's purportedly fragile banking system.

For what it is worth, my own view is that anyone betting against either the major banks or the Aussie housing market is going to end up losing a lot of dough in the long-run. Don’t get me wrong: I am not saying house prices will rise at unusually rapid rate. I am saying that the probability of the precipitous price falls portended by some is remote, to say the least.

One little-discussed point is that the wholesale funding vulnerability and high loan-to-deposit ratio risks are more or less a myth. The major banks are all way too big to fail (they control around 83 per cent of total ADI assets).

The Commonwealth would never for a minute allow any of the majors to be threatened with collapse. As we saw during the GFC, the moment the majors' wholesale funding lines were placed in jeopardy, the Commonwealth offered a AAA-rated taxpayer guarantee for a reasonable premium. The Commonwealth also guaranteed all deposits less than $1 million for free. And it has been revealed that the Commonwealth was willing to issue government debt and fund the banks directly in the event that the indirect guarantees did not work.

In short, if you want to construct an argument that the major banks have funding vulnerabilities, you really have to make a credible case that Australia is going to have a sovereign debt crisis--ie, that the Commonwealth is not capable of vouchsafing their liquidity. As we know, this is a very hard narrative to create given Australia's exceedingly low net liabilities.