Is this really good news?

Good news folks. Bloomberg reports:

Australian lending to businesses is growing at the quickest pace since the global financial crisis in a sign that the “animal spirits” long sought by the country’s central bank are finally stirring.

Loans to companies climbed 7.4 percent in April from a year earlier, the most since January 2009, according to the Reserve Bank of Australia. Record low interest rates are encouraging investment and the jump in corporate borrowing outpaced growth in mortgage lending for the first time in more than seven years as banks tightened home-loan standards amid regulatory pressure.

Hurrah! It’s ‘bunting time’, as we like to say.

But, is it really good news? (You knew there was a party-pooper moment coming, didn’t you?)

To be honest, we don’t know. But we’re always sceptical of statistics…any statistic — even our own! In this case we can’t help but think back to that quote last week from the National Australia Bank lending chap.

If you’ll recall, he mentioned that even though Australia’s dairy farmers were in a bind, he still expected decent lending growth in the agriculture sector.

To replay the quote again, it went as follows (source: Bloomberg):

National Australia Bank Ltd., the nation’s largest lender to farmers, is expecting its dairy clients to seek short-term credit to assist them as slumping milk prices have thrown the industry into a crisis.

Drought in the country’s east and a 20 percent fall in milk futures globally have farmers thinking of ways to tie them over during the crisis, by refinancing existing loans and taking on short-term debt, said Khan Horne, the Melbourne-based lender’s general manager for agribusiness. Such demand is expected to help maintain agriculture and dairy loan growth at 3 percent to 4 percent this year, he said by phone on Thursday.

Hmmm. So if we’ve got this right: some farmers aren’t taking out loans because they’re experiencing tremendous business growth, they’re taking out loans in order to ‘tie them over during the crisis, by refinancing existing loans and taking on short-term debt’.

Interesting. We’ll say nothing more on the matter…for now.


US markets were closed overnight, in observance of the Memorial Day holiday.

So, let’s look at the markets in the Southern American continent instead.

Brazil’s IBovespa index closed down 87.15 points, or 0.18%.

Argentina’s Merval index closed up 20.86 points, or 0.16%. And in Venezuela, the Caracas Stock Exchange index climbed 102.42 points, or 0.67%

In Europe, the Euro Stoxx 50 index gained 11.53 points, or 0.37%. The UK market was closed for the Spring Bank Holiday. Meanwhile, Germany’s DAX index gained 46.92 points, or 0.46%.

In Asian markets, Japan’s Nikkei 225 index is up 147.81 points, or 0.87%. China’s CSI 300 index is up 2.62%.

In Australia, the S&P/ASX 200 index is down 7.52 points, or 0.14%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$49.51 per barrel. Brent crude is trading for US$49.65 per barrel.

Gold is US$1,213 per ounce.

The Aussie dollar is worth 72.4 US cents.

How will this end?

According to the Wall Street Journal:

Martin Senn, former chief executive of Zurich Insurance Group AG who stepped aside in December, has killed himself, the company said — the second suicide by a onetime top manager at the company in the past few years.

People don’t tend to kill themselves when things are going well.

As the chart below shows, things haven’t gone particularly well for Zurich Insurance Group AG [VX:ZURN] since 2000:

chart image

Source: Bloomberg
Click to enlarge

And the stock is currently down 73.4% from the 1998 peak.

We can only wonder at what’s going on inside the big Swiss insurer.

But we can see that the share price collapse broadly reflects the recent downturn in fortunes for the company.

Since 2013, revenue has dropped from US$72 billion to US$60.5 billion. Net profit is down from US$4 billion, to just under US$1.5 billion.

We also note the changing composition of the company’s balance sheet in recent years.

Loans, mortgages, and fixed income securities have all fallen in terms of their share of the balance sheet. Equity investments and ‘other’ investments have all increased as a proportion of the balance sheet.

The reason for the change?

Interest rates. Or specifically, low interest rates…or even more specifically for Swiss firms, negative interest rates.

Interest rates are an important factor for insurance companies. They take premiums from customers, and then invest the cash in various securities pending the necessity to payout claims.

What you don’t want from an insurance company is for it to gamble excessively and take big risks. We know you don’t want that, because that in effect is what American International Group Inc [NYSE:AIG] did prior to 2008…which ultimately led to the US insurance giant’s financial collapse and bailout from the US Federal Reserve.

So, for the most part, insurance companies would like to put most of their cash (the ‘float’) into relatively safe investments. In the good old days, ‘safe’ investments were government bonds.

The insurance firm could buy bonds of varying maturities, and then hold on to them. If it came time to pay out a big claim, it wouldn’t be so hard to liquidate bonds, raise cash, and make payments.

But you know how things are now.

Of the 15 Eurozone economies tracked by Bloomberg, 13 have two-year government bonds yielding a negative interest rate.

And of the 14 Eurozone economies where Bloomberg tracks five-year bonds, nine have negative yields.

Then there’s Switzerland. It’s not part of the Eurozone, but it also has negative bond yields. Buy a 10-year Swiss government bond today and it will cost you 0.341% per year to hold it — that’s not including transaction costs.

If you want to grab a positive yield, you’ll have to look at the Swiss government’s 30-year bonds. They currently yield an eye-popping 0.188% per year.

And it’s not as though insurance companies will get much joy from the world’s biggest markets in the US and Japan. Two-year US treasuries yield 0.926%.

Japan’s two-year bonds yield minus 0.24%. Like Switzerland, an investor has to take out a 30-year bond in order to get a positive return. Even then, in Japan, it’s a paltry 0.3% — not including transaction costs.

It’s probably drawing a long bow to suggest that Mr Senn’s suicide indicates that the exposure of a huge scandal is imminent (but who would rule anything out these days?).

But it does come as a timely reminder that not all is well with the world’s financial condition.

When stock markets and stock prices are going up, nobody pays any attention to the things that are going on below the surface, or behind the desks.

But when markets fall, and when company profits start turning into losses, investors and analysts start to take a closer look at what’s going on.

One other thing

Briefly, back to where we started. You just knew we couldn’t keep our mouth closed.

The Sydney Morning Herald reports:

Inner-city apartment prices could be affected by a wave of new properties coming onto the market at the same time as some off-the-plan buyers struggle to settle on their purchases, Standard & Poor’s says.

The credit ratings agency has highlighted fears of an oversupply of apartments in Melbourne and Brisbane especially, alongside “settlement risk,” caused by tougher bank lending rules.

Don’t underestimate settlement risk. To register a ‘sell’, an apartment building will just require the payment of a deposit. On receipt of a set number of deposits from buyers, the builder will break ground.

However, the building process can take years, especially for high-density dwellings. And typically, while a buyer may have received pre-approval, it’s only when the property nears completion that the bank will finally approve (or not) the loan.

That’s the settlement risk. If the buyer can’t secure financing because banks are worried about the value of the apartment, the buyer won’t settle, and the builder is left with an empty apartment on their hands.

But, as Bloomberg reported yesterday, the euphoria around new apartment buildings is still sky-high:

All 391 apartments offered by Lendlease Group at a project in Sydney were snapped up in just four hours on Saturday, indicating demand for inner-city homes remains buoyant despite looming oversupply.

More than 400 potential buyers turned up from 8 a.m. in Darling Square, a development on the western edge of Sydney’s central business district, for the apartments that were priced from A$630,000 for a studio to A$3.5 million for a three-bedroom penthouse, Sydney-based Lendlease said in an e-mailed statement.

[Gulp!] $630,000 for a studio apartment.

As always, good luck to them, buyers and sellers alike.

Lendlease Group [ASX:LLC], sure better hope that the market doesn’t turn south. With a skinny profit, relative to revenue ($618  million profit, $14.7 billion revenue), and $2.5 billion of debt on the books (not to mention the $1.2 billion in goodwill), any downturn likely will hit the company hard.

This is another stock we’ll follow with interest, for signs of weakness in the Aussie economy.

Conference sell out

Beyond all my expectations, ‘early bird’ tickets for the 2016 Port Phillip Publishing investment conference have officially ‘sold out’.

In fact, we exceeded the our quota of 400 ‘early bird’ tickets by a hefty margin! The good news is, we’re honouring those tickets, and we’ve been in touch with the venue to see how they can accommodate the extra numbers.

Fortunately, they can. Details soon.

In hindsight, it shouldn’t surprise me that we sold out so quickly…and five months in advance of the show, to boot. After all, with Jim Rogers (that’s right, famed investor, Jim Rogers) as our main keynote speaker, that’s a name Aussie investors don’t get to see in person that often.

In short, I’m thrilled about the huge interest in the conference. Now we just can’t wait to get the thing started. The countdown begins.

In the mailbag

More on the milk saga. This email from subscriber, Brian:

I read with interest your article on the dairy farmer problem, You have missed one important fact.

The price the dairy farmers were receiving from the two factory’s had a retrospective clause that had never been triggered before.

Simply that if the world price of milk solids fell then the farmer would have to repay the previous year’s payments received down to the new base price.

This is where the debt comes from.

The factories (Murray G & Fonterra) were too optimistic in their forecast of global pricing, paid the farmer too much and now want it back by triggering the clause.

I am not in the industry but follow agriculture with interest.

Do your homework on this one Kris!!

Homework? Pah to homework. Why do homework when we can just throw around generalisations and make stuff up!

Honestly, I’m aware of the circumstances, but it doesn’t make a difference. In fact, I pointed this out last week in the news clippings from 2014. The big milk co-ops were over-optimistic. They forked out hundreds of millions of dollars in new infrastructure.

And no doubt, the farmers took out big loans, perhaps to improve their own infrastructure, or to rear more cattle.

Hence our point about there not being a new way to go broke. It’s all about debt.

I can’t say I’ve seen the contract between the farmers and the co-ops. Undoubtedly, it refers to ‘clawbacks’ in the terms. Also undoubtedly, in the hubris of 2014 and since, few thought that would ever happen.

Now it has. And now for the consequences.

We’ve also received a long letter from subscriber, Malcolm. We’ll print that letter in tomorrow’s mailbag.