Why Singapore wants our ASX November 24, 2010

Howdy, today we ponder the question why Singapore wants our ASX.

A city-state of five million people with no natural resources is bound to put more effort into achieving its goal to be a region’s financial hub than a resource-rich, island continent of 22 million people enjoying a commodities boom.

Therein lies one explanation why the government-backed Singapore Exchange is attempting to take over Australia’s main stock exchange, rather than perhaps the reverse.

Australian politicians, like their Singapore counterparts, have long touted a desire to promote Sydney as a regional financial centre over Hong Kong and Singapore. In 1999, prime minster John Howard and NSW premier Bob Carr led a delegation to New York to publicise Sydney’s credentials (skilled population, first centre open in the region thanks to its time zone and developed financial sector).

Only two years ago, NSW premier Morris Iemma spoke of making Sydney the “hub of hubs”, while the then federal assistant treasurer Chris Bowen said he would lead an “Olympics-style push” to promote Sydney.1 Last year’s Johnson report, or more formally, the report by the Australian Financial Centre Forum, shows that these efforts persist.2

But the better-located Singapore seems to have done more to make it happen. And a successful takeover of the ASX would probably give it an unbeatable lead over Sydney in the hub race that Hong Kong leads anyway.

Singapore’s first significant steps to become a regional financial centre took place in 1997-98 when the city-state liberalised key financial industries including retail banking, insurance and stockbroking. Around the same time, the island’s central bank, the Monetary Authority of Singapore, established a department with offices in London and New York to promote the island as a finance hub.

In 2002, a government committee released a strategic review that identified four niches upon which to build Singapore’s hub credentials. These were wealth management, processing, risk management and “an attractive business environment“ – which stood for, among other things, making Singapore a low-tax country with the necessary infrastructure and a skilled population to attract foreign businesses and finance.3

The result is that Singapore is now a flourishing centre of finance. More than 300 of the 740 companies listed on the Singapore Stock Exchange are foreign ones,4 whereas only about 70 foreign companies are among the more than 2,100 listings on the Australian Securities Exchange and this number includes ones from Papua New Guinea and New Zealand and Australian-born companies such as ResMed, Rupert Murdoch’s News Corp. (twice) and James Hardie Industries.5 In October, the Singapore Stock Exchange began trading in American depositary receipts of 19 Chinese companies. It plans to quote similar instruments for India, South Korean and Taiwan companies next year.

Singapore is the largest real estate investment trust market in Asia ex-Japan and one of the top five most-active foreign exchange trading centres in the world (despite having a controlled exchange rate). Singapore is the second largest over-the-counter derivatives trading centre in Asia, and a leading commodities derivatives trading hub. Its wealth-management industry controls about S$1 trillion (A$770 billion).6

The pivotal play

And now Singapore Exchange has launched the bid that could catapult Singapore ahead as the region’s hub for equities. That campaign is not without its problems though.

The facts of the bid are that on October 25, Singapore Exchange launched a cash-and-stock offer for ASX that valued the target at $8.4 billion. If approved in Singapore and Australia, the deal would be the first Asian cross-border merger of an exchange operator.
Since the Singapore Exchange is 23.5% owned, and effectively controlled, by the Singapore government, it can count on that approval. The problem is that in Australia the deal needs government and, most likely, parliamentary approval.

The Labor government has the right to block foreign takeovers in the “national interest”. The Foreign Investment Review Board has up to 120 days to make a recommendation to the government. More problematic is that the government will probably need to gain parliamentary approval to lift the 15% ownership cap on the ASX stipulated in the Corporations Act. (Two lower house members or one senator can force a vote by challenging the government’s right to amend this stipulation.)

Within days of the bid Green, Coalition and independent MPs and senators expressed concern that the takeover would damage Australia’s ability to be a regional financial centre. The Coalition could help the government pass any motion though.

Whatever the outcome of the bid for the ASX, it’s worth pondering how Singapore’s government would react if someone tried to take over the Singapore Exchange and disrupt Singapore’s goal to be the region’s premier place for finance.

Have a great day

Luke

Water – The case for alternative investing November 24, 2010

Morning All,

As you would be aware, RetireCare has led the charge in terms of alternative investing as we believe that this is the way of the future. That said, today’s post centers on the importance of water and what it means for investors. Enjoy………

Water is often taken for granted. After all, it covers two-thirds of the Earth’s surface. Unfortunately, only 2.5% is freshwater and only one-eighth of this is easily accessible in rivers and lakes for human use. As populations grow and water use intensifies, water is bound to dominate the economic, social and investing landscape of the 21st century.

Since 1950, estimated global water use has trebled. And that rate of growth will only quicken. But already the strain on water resources is apparent.

The over-pumping of water supplies has led suggestions that Hubbert’s ‘peak’ theory of resource use applies to water as much as to oil. The International Water Management Institute predicts that, by 2025, 36 countries in the world will fall into the category of being “fresh water scarce”. Climate change and desertification will exacerbate the problem, especially in water-challenged countries.

India, for example, with 17% of the world’s population but only 4% of its water, has the greatest rate of water withdrawal in the world. The Indus and Ganges rivers are so tapped that, except in rare wet years, they no longer reach the sea.

China, with 19% of the world’s people yet only 7% of water supplies, has the world’s second-largest rate of water withdrawal. Five of the seven main river systems in China were classified as “severely polluted” by the World Resource Institute in 2008. Hundreds of lakes have disappeared over the past 20 years as water table levels fell and aquifers were over pumped.

No surprise then that the biggest water infrastructure needs are in the developing world where many of the flashpoints over water reside. (Turkey is the source of water flowing to Iraq and Syria while China sits upstream of Bangladesh, Cambodia, Laos, Myanmar and Vietnam.) China committed US$20 billion (A$20 billion) to water infrastructure in its post credit-crunch stimulus. Less obvious is that the developed world too needs to upgrade and enhance outdated infrastructure. Much of the water infrastructure in the US (for instance in New York) is around 100 years old.

Other sources

‘Alternative’ supplies of water will help relieve the demands on water. One option is sea water. In the Middle East, largely in Saudi Arabia, desalination already satisfies over 70% of the region’s freshwater needs. There are some drawbacks with desalination though. The plants are expensive. The process is costly and energy intensive. Byproducts need to be disposed of.

Another alternative supply is water recycling. More than 40 million cubic metres of municipal wastewater is recycled daily worldwide, mainly for irrigation and industry, but this still represents only a fraction of total water use. If the process improves and people overcome the ‘yuck’ factor, there is no reason why recycled water cannot be used in sanitation and for drinking. If so, recycling could form a significant part of the solution to water scarcity.

Some other interesting technologies might help too. Nanotechnology water purification can improve water quality through the use of advanced filtration materials that enable greater water reuse, recycling and desalination. Condensation windmills can harness wind power to collect water out of the atmosphere, while cloud seeding is a form of weather manipulation that works by firing silver iodide into storm clouds. It has been used by the US and Chinese governments to bring rain to farming lands with mixed results.

Goldman Sachs predicts the US$425 billion global water industry could enjoy long-term annual growth rates up to 6%, as the world attempts to solve its water shortage. If so, there are many interesting water-related stocks poised to benefit.

RusHydro, for instance, is Russia’s largest hydro-generating company and the world’s second largest in terms of installed capacity. Doosan Heavy Industries from South Korea is the global leader in desalination. Jain Irrigation Systems from India sells its drip and sprinkler irrigation systems in more than 110 countries. Veolia Environnement of France provides drinking water for more than 78 million people and wastewater services for more than 54 million. Fluor from the US is the company that rebuilt Iraq’s water supply and distribution system.

The value of water

While alternative sources and technology call help alleviate water shortages, perhaps the biggest fillip would be a change in mentality among users.

Water is seen as a basic right rather than a commercial good that merits a return on investment for government or private providers. The fact that water prices are generally subsidised has helped fuel the misperception that water is cheap and abundant. Hence the waste.

Many economists argue that to reduce waste society needs to create a value around water use such as Australia’s ‘National Water Initiative’ does. The scheme values water based on what users will pay.

Certainly something has to happen to solve the world’s present and future shortages of water. Resolving this challenge is sure to make water a mega-issue of the 21st century – perhaps the defining one. From an investment point of view, there will be many winners.

Bidding you a sensational day ahead

Luke

Credit Cards ……. yes its true we love them November 18, 2010

Morning All,

Hope all is well.

Today we post a contribution by Justine Davies who writes about credit card types. While we can confidently say that the bulk of our clients are of the savvy type it would pay for you to have a read if simply just to confirm.

Aaah – credit cards. We love them, don’t we? Well, that’s what the RBA statistics tell us anyway, seeing as we owe almost $48 billion on credit cards – $35 billion of which we pay interest on. Ouch.

Yet with the exception of this article, credit cards just don’t get mentioned when the banks lift their interest rates. But depending on what type of credit user you are, credit card debt can be a crippling cost to your budget. So readers, sit down and have a serious think about what credit “type” you are – and whether there’s anything you should be doing about it.
And to get you started, here are a few common examples:

Mr/Ms Average

With an average Australian credit card balance of around $3,000, Mr/Ms Average is someone who uses their card frequently but never quite pays off the amount owing each month. Don’t be fooled though – that small(ish) debt can cost a lot.

What’s the cost? Let’s say your $3,000 is at 19% and you always make minimum repayments, you could end up paying around $10,000 in interest – more than three times the original loan value.

What to do? Well pay it off is the obvious solution, but if you can’t manage that, then forget about interest-free periods or rewards points and simply find a card with a really low ongoing interest rate. If, for example, your card is 9% instead of 19%, then the interest you pay will be around $1,600 instead of $10,000. A huge difference!

Savvy shopper

The savvy shopper also uses their card frequently, but pays off the amount owing each month. Banks really don’t appreciate this type of customer!

What’s the cost? Happily, nothing – you’re using your card the way it should be done. Good work!

What to do? What you can look for is a card that has a long interest-free period so that you’re not rushing to make the repayment as soon as the statement arrives. If you spend enough you can also shop around for a good rewards program – although you need to spend at least $12,000 – $14,000 pa to make having a rewards program worth the annual fee.

The juggler

Sometimes despite our best intentions we get caught in a cashflow trap, with an increasing proportion of our income going towards the interest charges on a credit balance that we can’t shake. It’s incredibly stressful.

What’s the cost? It can be enormous. Financial stress is one of the top causes of relationship conflict, and according to a Relationships Australia survey one third of people who get divorced blame money conflict as the main reason. And – it can all start with your credit card.

What to do? If it’s totally out of control, consider seeing a financial planner or counsellor. Otherwise, vow to change your habits and find a card which offers a very low rate for balance transfers. Transfer what you owe and set up a regular repayment system to get it paid off. Don’t use the card for anything else. Then get yourself a debit card to use from now on.

And of course, we mustn’t forget:

The tosser

Being a tosser isn’t so much about the amount you owe but the card that you have. Tossers frequently put a great deal of thought into the design and colour of their card, and when they reach platinum status – preferably with a holographic image as well – they like to nonchalantly “toss” their card on the table in front of as many people as possible, as often as possible.

What’s the cost? Loss of friends, particularly if the tossing is accompanied by some sort of moronic, big-noting remark along the lines of what a fantastic person they are.

What to do? Leave them alone. It’s usually indicative of even worse tosser-like personality traits, and they probably can’t be cured.

Anyway, enough from me. If you recognise yourself in one of the above “types” and want to change the type of card that you have, then some good comparison website include Ratecity and Infochoice.

Bidding you all a great day

Luke

So what can $1M actually buy you ……… Victoria’s property market November 15, 2010

Howdy All,

We trust that you enjoyed a pleasant weekend.

With the assistance of Chris Vedelago here’s a look into Melbourne’s million-dollar property market — what it takes to buy in at this level, how often this kind of money gets spent and just how far $1 million will go.

Spending it

Consider what it takes just to afford to buy into this price bracket.

A $1 million property purchase requires a 10 per cent deposit of $100,000 in cash. Stamp duty would add another $55,000.

Assuming the buyer borrowed up to 90 per cent of the purchase price ($900,000), their monthly mortgage repayment would be about $6200 at current interest-rate levels. In comparison, full-time workers earn on average about $5655 a month — before taxes — according to the Australian Bureau of Statistics.

Put another way, someone buying a $1 million house will spend far more on their mortgage in any given year than the average person will earn. And these figures only cover what it costs to buy; not council rates or owners’ corporation fees for townhouses or apartments, which often run into the thousands of dollars a year.

Given the enormous level of personal wealth required, it would only be natural to assume demand for these kinds of properties would have to be fairly limited. But that assumption would be seriously wrong.  The million-dollar market is a lot larger, and often a lot more active, than you might believe.

A growing club

Melbourne’s first million-dollar suburb was, not surprisingly, Toorak, which broke through the price barrier in March 2000.

A decade later, there are 38 suburbs where the median house price is above $1 million, according to the Real Estate Institute of Victoria.

Overwhelmingly clustered in the city’s eastern and bayside regions, the million-dollar suburb club is dominated by long-time blue-chip areas such as Toorak, St Kilda West, Kooyong, Armadale, Canterbury, Brighton, East Malvern and Kew, with median house prices starting at $1.5 million and rising to more than $2.3 million. But there are also a number of recent entrants to the club — such as Alphington, Beaumaris, Kew East, Balwyn North, Elsternwick and Caulfield — which broke the million-dollar barrier in the 2008-09 financial year.
(The sharp price falls that were witnessed during the 2008 global financial crisis knocked a number of suburbs out of the million-dollar club, many of which have only managed to regain that standing in the past year.)

But even this doesn’t illustrate the true extent of the market for million-dollar properties. In financial year 2009-10, about 230 suburbs around the city witnessed the sale of a house worth more than $1 million.

And the identities of quite a few may surprise: Melton South, Werribee, Hoppers Crossing, Carrum Downs, Pakenham, Noble Park, Caroline Springs, Glenroy, Footscray, Keilor, Narre Warren North and Reservoir. In fact, the REIV estimates that 5000 million-dollar-plus sales have taken place since the start of the year, accounting for about 7 per cent of all transactions in Melbourne over that time.

Interestingly, demand at this level was robust enough for the government to cap eligibility for the first home owners’ grant at properties worth $750,000 or less in January after it was revealed that hundreds of Victorians had used the grant to buy million-dollar-plus first houses in 2008-09.

So many million-dollar-plus properties are now selling in so many parts of the city, it has led to a redefinition of what price the “premium” or “top end” of the market starts.
“In the past three to five years, we’ve seen the market move so quickly that the top end probably doesn’t really start now until the $2.5 to $3 million mark,” Gerald Delany, managing director of Kay & Burton, says.

What do you get?

So what does $1 million buy nowadays?

Generally speaking, it should still buy some kind of house in virtually any suburb within 15 kilometres of the CBD. In some, only just. In others, you won’t get much.

There’s an enormous difference in just how far $1 million will go depending on the area, the type of property, its condition, the size of the land and even its position in a suburb.
“A million dollars doesn’t buy you a decent house in a lot of suburbs these days,” Mal James, head of James Buyer Advocates, says. “If you’re a family with two or three kids, it won’t buy what you want in most of inner Melbourne. If you’re a couple, a downsizer or an up-sizer, you’ve still got quite a reasonable chance at buying something.”

The consensus among property experts is that it’s in the west, north-west and north where the money would go the furthest.

Spending $1 million in Yarraville (median $656,500) should deliver a renovated, double-fronted period house of three, possibly four, bedrooms on a sizeable allotment.
In Moonee Ponds ($861,500), it could get a renovated single-fronted house. But it would probably only extend to an unrenovated, double-fronted house in a poor position in Essendon ($1.15 million).

For the popular inner-northern suburbs of Carlton North, Brunswick, Fitzroy, Fitzroy North and Northcote — where median house prices range from $720,000 to $894,000 — a savvy buyer can still pick up two- or three-bedroom single-fronted renovated houses — and maybe even a double-fronted property — for about $1 million.

“In Richmond [$857,500] at the moment, it would buy you a very good quality 10- to 15-year-old three-bedroom, two-bathroom townhouse with one car space in a good location,” Chris Murphy, director of Hocking Stuart, says. “It will buy you an unrenovated, double-fronted weatherboard home but it would be on a small block of just 250 to 300 square metres.”
And that’s a commonality in the inner eastern and southern regions of the city — properties can still be had for $1 million but they often come on very small allotments, in a fairly basic condition, or both.

Albert Park ($1.11 million) could offer up a few options in terms of unrenovated, single-fronted two-bedroom properties but they would be on a small bit of land that most likely lacks off-street parking.

The options in South Melbourne ($1,150,000), Prahran ($905,725) and South Yarra ($1,020,000) would be slim to non-existent for a renovated house at the $1 million mark, although there could be poorly positioned, unrenovated houses — and a number of townhouses — available.

As for the blue-chip suburbs of the east and bayside — Camberwell ($1,335,000), Caulfield ($1.3 million), Glen Iris ($1,327,500), Hawthorn ($1,197,500) and Brighton ($1,516,000) — pretty much any house or townhouse at $1 million, if you can find one, is likely to be compromised.
“The further away you go from the city in any direction the better chance you’ve got of finding a full block of land with a fully renovated property on it,” Catherine Cashmore, of JPP Buyer Advocates, says.

“In the better areas of Bentleigh East ($802,500), renovated family-size homes on full blocks of land are up around $1 million. However, go a little further out towards Edithvale ($585,000), Chelsea ($560,000), Cheltenham ($650,000) and parts of Highett ($737,000) and, if you’ve got $1 million to spend, you’ve got plenty of options.”

As for Toorak? A million dollars will get you a small townhouse or apartment but it would be very nice.

State of the market

Recently, $1 million has been stretching a little further than it used to.

In the year to March — when Melbourne’s property market was hitting the peak of its recent boom — the median price for the top 5 per cent most expensive houses in the city shot up 43 per cent.

As the market has noticeably slowed over the past few months, prices at the top end have begun to ease, with the REIV reporting a drop of 1.2 per cent in the September quarter.
Buyer’s advocate Chris Koren of Morrell & Koren said buyers in the $1 million-plus range should be prepared to wait for the right opportunities.

From where we sit, it is fair to say that the property market has run hard and while we do not foresee a collapse we do believe that opportunities will avail themselves so for those keen to invest in property our advice would be that you bide your time as the chances of a few bargains emerging remains high!

Bidding you all a most wonderful day ahead

Luke Eres

Interest Rate Rise …… premature perhaps November 11, 2010

Hi All,

I hope that today’s blog finds you well.

If we look at the recent economic data that was released it could be argued that the Reserve Bank may have got the numbers wrong and jumped the gun so to speak. In fact when we speak to our clients who manage businesses, the feedback varies. Yes in some instances times are great whereas in other instances things are definitely starting to bite.

It would seem that Dr Woods agrees with our assessment and we attach his current article titled Ignoring the Evidence for your perusal

Dr Ron Woods – Ignoring the Evidence

Have a great day

Luke

Bank bashing is fun ……. but we need to be careful for what we wish for November 10, 2010

Afternoon All,

I trust that this update finds you well.

I must admit that I have been a little intrigued by the arguments put forward by Mr Swan & Mr Hockey in relation to the banks. Yes I am the first to agree that the banks have not really played the game fairly, but that said they are companies who are accountable to their share holders. As is stands we are blessed to have four strong banks which have weathered the global storm and it is because of this that our economy remains strong and that life as we know it has remained positive.

However, with the call for increased regulation we do run the risk of actually crippling quality companies. In today’s article which was provided by Rob Burgess we discuss the risks of going too far. We trust that you will enjoy what has been provided.

The great bank debate of 2010 may, three years hence, come to look a lot like an argument over arrangement of deckchairs on the Titanic – the latest spat being over
whether people like CBA’s Ralph Norris deserve their sunny spot on the foredeck.

Treasurer Wayne Swan has announced that he wants to look at bank executive remuneration and though this reeks of populism, to be fair to Swan it’s also part of a global push to break the positive link between risk-taking and top salaries.

Swan will be emboldened to push ahead with bank reforms by the Mid Year Economic and Fiscal Outlook (MYEFO), released yesterday, which predicts GDP growth rising, jobs growth ahead of pre-election forecasts, and inflation ‘within the band’ – and with a few deferred spending programs and tax concessions Swan will still return the federal budget to surplus in 2012/13.

So it’s all good. All the more reason, you might think, to continue to vie with Joe Hockey for the title of Australia’s biggest bank basher. If the banks can’t be brought to heel during boom times, when can they?

But there is an element missing from the bank debate that, when fully considered, starts to make Joe Hockey’s nine-point plan, and Swan’s alternatives to it, look like a rocket behind the housing market that will propel it, and the Australian economy, into a chasm from which it may never emerge.

To begin to understand why, it’s necessary to reflect on how quickly commentators have abandoned the ‘will China fail’ rhetoric of 12 to 18 months ago.
China was then suspected of hiding massive non-performing loans in its banking system; was thought to be stock-piling un-needed commodities and unused goods such as large vehicle fleets; was seen to be inflating a property bubble down the east coast; and was struggling with 10 per cent-plus inflation.

A year on, iron and coal prices are riding higher than ever, the China-backed commodities boom is now assumed to be set to last for decades and Australia is once again placing its entire future on one massive bet – that a 50 per cent centrally planned economy has got its growth settings right and we, as its iron and coal supplier of choice, should just sit back and enjoy the wealth.

And perhaps that would be fine if, like Norway, we knew what to do with the wealth. Oil-rich Norway has exemplary education programs for its young to maintain its position as a ‘clever country’ and massive sovereign wealth fund investments to cushion the blow when its oil wells begin to run dry. Its gargantuan ‘Government Pension Fund – Global’ is worth half a trillion US dollars and holds approximately 1 per cent of global equities.

But Australia had a much better idea. As mining boom Mark I, and now Mark II, developed, we decided to channel a good deal of our wealth into our own houses. As Steve Keen has documented over the past two years on Business Spectator, the nation’s stock of housing debt just grew and grew, without substantially improving the availability of housing stock.

The market appears to have turned, as Keen documents in a piece today, but that fact remains the balance between investment in genuinely productive assets and in houses (which still turn out the same number of smartly dressed workers each morning), was lost along the way.

Now, while the mining boom is in full swing, Joe Hockey wants to make it easier for local investors, via mortgage-backed securities, to pour more of our national savings into property. That’s ‘increased competition’, ergo it must be good.

Point five of his nine-point plan states:

“Let’s ask the Treasury and the RBA to investigate ways to further improve the liquidity of the residential and commercial mortgage backed securities markets, which are an alternate source of funding for smaller lenders, including consideration of the Coalition proposal to extend the government’s credit rating to AAA-rated commercial paper in those markets to improve liquidity.”

The housing and commercial property markets will get the money they need to keep growing, and money can flow out of the treacherous equity markets. What have they ever funded anyway, except for a whole bunch of useless factories, airlines, miners and finance houses. Who needs them when you can re-buy the same houses over and over again, and sell them at a profit each time to a new generation of suckers?

Something has to change with banks – but it is not a return to cut-throat lending, maximising the volumes of debt secured against Australian property, that we saw in more ‘competitive’ times.

Australia’s soaring terms of trade are the result of a wonderful, fortuitous mining boom, but one that can still come a cropper.
Australia Inc might be betting everything on one minerals boom, but BHP in particular has shown it is not so stupid – it has a rich, diversified portfolio of projects around the globe, to which it most recently tried to add a potash asset of global significance. When the foundations of the Australia economy begin to show cracks, it will wisely lean on its other operations to stay profitable.

And this is the great flaw in both Hockey’s and, to a lesser extent, Labor’s plans for the banks. Both are egging our biggest finance houses on to provide a new boom in property lending, while we simultaneously watch the above-partity AUD ravaging our $18 billion education export sector, our embattled manufacturing industry, our tourist offerings few foreigners can now afford, and give up finally on ever being a major exporter of services as a regional finance hub.

On Monday in Perth, an angry Andrew Forrest told a Senate committee examining the mineral resources rent tax that the best days of the iron ore boom have already passed, and that prices will fall just as the MRRT is supposed to begin shoring up the federal budget.

The day before that, news wires published the story of Lui Shijin, a deputy director of the China’s Development and Research Centre under the State Council, who expects Chinese GDP growth to fall below the magic figure of 8 per cent, to sit around 7 per cent within three to five years.

It’s quite possible neither of these stories deserve much emphasis in the scheme of things. But it’s also quite possible that surprises remain in the strength and length of the resources boom.

Treasury says in yesterday’s MYEFO: “As the global supply of iron ore and coal increases, the medium-term outlook is for Australia’s terms of trade to decline. However, the rapid pace of economic development in emerging Asia – and the prospect that strong resource-intensive growth in China and India will continue for many years to come – underpins expectations that the medium-term decline will be gradual, notwithstanding the potential for significant volatility over shorter time horizons.”

While the economy will adapt to a ‘gradual’ softening of the resources boom, periods of ‘significant volatility’ that might easily be weathered by diversified plays such as BHP, will be reminders to the rest of Australia that we need more than mining and debt-fuelled housing inflation to be a robust 21st century economy.

The most basic principles of risk management suggest that Hockey and Swan should not be outdoing each other to try to re-ignite our property lending boom.

Far better to encourage investment in the industries and infrastructure that will be our lifeline if the resources boom ‘unexpectedly’ lets us down.

Bidding you all a wonderful day ahead

Luke

Bloody Banks ……. Time to fight back November 9, 2010

Morning All,

While this is not relevant for many of RetireCare’s immediate clients we all know of family members and friends who are struggling with their mortgages.
With that in mind we have attached an article written by David Koch which we believe may be of use. Enjoy.

Bloody Banks …… Time to fight back

THE banks have called our bluff in lifting loan rates by more than the Reserve Bank’s official increase.

So what are you going to do about it?

Are you going to be a wimp and just cop it on the chin, as your bank is hoping, or are you going to fight back, make a point and save some cash?

The banks assume you’ll whinge for a few days, do nothing, move on with your life, pay the extra and add to their profit growth.

The banks whinge about doing it tough but then produce record profits results.

They must think we’re stupid. Unfortunately, the reality is they’re right. There’s more chance of getting a divorce than changing banks.

Our view is that you have no right to whinge unless you’re prepared to do something about it.

This is how you fight back:

When is the last time you sat down and looked at all the products and policies you have with your bank and how much you pay for the privilege?

The first step is to list all those products loans, deposit accounts, insurance policies, credit cards, superannuation and other investments.

Then look at the statements for the last year and add up all the bank fees and premiums deducted from those accounts.

Add up all the interest which has been paid. Then, to be fair, add the interest and investment returns earned.

Most people are amazed at how many accounts are on the list and can automatically see which obvious redundant accounts can be culled.

CHECK ALTERNATIVES

Finding alternatives and doing your comparative financial shopping is so easy online.

Our top sites are infochoice .com.au and ratecity.com.au. Both sites have extensive comparative tables of every type of loan and deposit being offered.

They also provide research on the different products and make recommendations.

These two sites are an absolute must to visit and you’ll be amazed at how many options are available.

You’ll also be stunned by how much extra you’re paying on your current loan.

For example, did you know there are standard variable home loans on offer for between 6.3 per cent and 6.6 per cent from established credit unions and non-bank financiers?

Don’t forget to read the fine print on some of these low rate loans because they can come with quite hefty establishment and exit fees.

DEMAND A BETTER DEAL

Go to your bank, talk to a bank staff member (see them in person rather than over the phone or online) and demand a better deal.

You have the facts. You know how much you pay in fees and what products you have. You’ve been online and researched other options, now you have to confront your existing bank for some action.

Explain that you’re prepared to shift institutions but are quite happy to stay if they sharpen their deal to match what you can get elsewhere.

Banks know it is better (and cheaper) to keep a good existing customer than go and find a new one.

Don’t be shy. Be confident, be forceful but be professional.

VISIT THREE OPTIONS

It’s all very well to talk and research, but doing is totally different for most people.

Contact or visit three other financial institutions to discuss your requirements and the process needed to make a change.

Explain what a good customer you’d be, you’re annoyed with your existing bank and how you’re ready to change. But still try for a better deal.

Sure, you’ve been attracted by the advertised rate on offer but still ask whether they can do even better.

They can only say no, so it’s definitely worth a try.

BE PREPARED TO CHANGE

Crunch time. You have the facts, researched the options, discussed it with the bank and talked to the alternatives.

The bank won’t budge and you’re fed up.

It’s time for action and that can be scary.

But it’s mostly in your head. Be confident.

You’ve done the homework, you know the options available, so back yourself.

FOCUS ON YOUR DEBT

With interest rates likely to continue rising next year, debt management becomes your number one priority.

It’s important to understand the different levels, and costs, of the debt and follow some simple steps.

Pay off the most expensive debt first.

Use savings to pay down your debt.

Talk to your bank if you’re in trouble and re-negotiate the term of the loan to reduce payments.

Seek professional help with RetireCare Personal Wealth Management being your first stop.

Bidding you all a wonderful day

Luke

US Mid Term Elections …… Oh no here we go again ….. November 5, 2010

Howdy

The US midterm elections on the 2nd of November saw a strong swing towards the Republicans, who regained control of the House of Representatives and narrowed considerably the Democrats’ majority in the Senate. We have provided a quick summary of what these results mean for US government policy over the next two years.

The key takeout from this election is that the US Congress is now split, with both parties able to block the passage of any legislation that does not have strong bipartisan support. In general the two parties appear to disagree on most major policy issues, and two years of political “gridlock” in Washington is a very real possibility. However, a split Congress may also prompt improved cooperation and negotiation between the two parties, at least until the US presidential election campaign gets going early in 2012. One area on which both parties appear close to agreement on is the rollover of tax cuts first implemented under President Bush.

However, with the US Federal Reserve announcing an additional US$600 billion quantitative easing program this week, it is arguable that it is the Fed, rather than Congress, that is driving macroeconomic policy at present. Furthermore, given the very large fiscal deficit, the government may have limited scope for any major new fiscal stimulus measures, even if Congress was willing and able to create one. As such, it could be argued that a slower political process in Washington may have limited economic impact over the short term.

With the post-election political balance very finely set, and the next US presidential election only two years away, policy mistakes cannot be ruled out. Given high unemployment and the weak housing market in the US, politicians will be under pressure to address voters concerns quickly. Damaging currency or trade battles are still a possibility cannot be ruled out in the present environment, and these could have worldwide effects.

Perhaps most importantly, the US political environment does not appear prepared to address the many challenges the country faces over the medium to long term. In general, we are yet to see credible responses to issues such as the high level of public debt, the rise of China as a strategic competitor, stagnant middle-class incomes and rising economic inequality. These are some of the critical problems that Washington needs to focus its attention on. Based on this week’s midterm election results, we see no reason to believe these problems will receive the attention they deserve over the next two years. Eventually investors in treasuries and US equities are going to start asking the US government some difficult questions.

Luke

So what are these Quantitative Measures that US Federal Reserve Introduced November 5, 2010

Hi All,

No doubt you are enjoying this fine sunny day! With the US Federal Reserve continuing to print money we figured  we would provide you with an update.

Early Thursday morning Australian time the US Federal Reserve announced that it will pump US$600 billion into the US economy by the middle of next year in an attempt to boost its fragile recovery. This equates to a rate of US$75 billion per month, and will be done via the purchase of US government bonds (“treasuries”). When the Fed’s treasury purchases from reinvesting proceeds of mortgage payments are included, total purchases by the Fed between now and June 2011 will be between $850 and $900 billion. The new measures had been widely expected, although the $600 billion figure was marginally above the $500 billion expected by the market.

The key reasons for these new measures lie in the Fed’s dual mandate, which to the pursuit of price stability and full employment. Price stability is generally defined to be around 2% inflation as anything lower than that risks slipping into deflation. At present, core inflation in the US is around 0.8%, and unemployment lies at a high 9.6%. Understandably, the Fed felt it needed to act by providing further stimulation to the economy in order to move towards achieving its mandate in both areas.

To bring down unemployment materially, the US economy essentially needs to grow at above trend (around 2.5%) growth for a number of years. Strengthening the US recovery, and providing a platform for 3% plus annual growth over the medium term, is basically the goal of this latest initiative. Quantitative easing can stimulate economic growth in a number of ways. Below is a brief summary of three of them.

1. Increasing Consumer Spending

Pumping money into the economy can increase asset prices, which improves household balance sheets. Making consumers feel wealthier, through higher house prices and/or bigger investment portfolios, can give them the confidence to spend rather than save. Over the last three years, the savings rate has risen from below 2% to around 6% of personal incomes. While over the long term increased savings are necessary to improve household balance sheets, it is not desirable that this take place while the US economy is as weak as it is at present.

2. Decrease Interest Rates

Theoretically, lower interest rates provide a stimulus to the economy by lowering debt costs, freeing up cash flow for spending activities and encouraging further borrowing. However, given interest rates are already very low, and corporate cash balances quite high, it is questionable whether lower interest rates will provide a big stimulus for the economy. Low credit growth over the last two years has been primarily related to borrowers’ reluctance to borrow and lenders’ reluctance to lend than interest rates being too high.

3. Lowering the Exchange Rate to Encouraging Exports

Increasing the supply of US currency should put downwards pressure in the value of the US dollar. As the dollar falls, exports should rise, providing further stimulus to the economy. However, this strategy is being used by numerous countries around the world in an effort known as competitive devaluation. This may limit its effectiveness.

We have already seen a strong rise in risk assets generally over the last three months as investors anticipated the measures announced this week. However, going forward the quantitative easing measures will need to translate into improved economic growth. If this does not occur, markets for risky assets may disappoint investors.

While the Federal Reserve’s actions will no doubt provide inspiration to the market in the short term it will no doubt give rise to problems in the future. That said there seems little point in trying to stem the tide today so in the short term it is fair to say that things will be good.

Have a great weekend

Luke

Housing Bubble …… Dr Woods thinks not November 3, 2010

Hi All,

Hopefully you all backed a winner yesterday.

It would appear that our resident economist has been a bit a busy lately in trying to dispel the theory that we are experiencing a housing boom. For a collection of Dr Ron’s thoughts please click on the links below

Dr Ron Woods – House Price Bubble

Dr Ron Woods – House Price Bubble Mark Two

Bidding you all a great day ahead

Luke