Hong Kong Opens New Year Trading with a 3.85% Slump! Australian Equity Benchmark in Bear Market!

China remains on a week long holiday to celebrate their New Year. Yet curiously, in Hong Kong where financial markets has re-opened today, the latter's stock market greeted the New Year with a slump!

The major bellwether the Hang Seng index plummeted 3.85%. What a way to meet the New Year!

From Bloomberg:

Hong Kong stocks fell in their worst start to a lunar new year since 1994 as a global equity rout deepened amid concern over the strength of the world economy.

The Hang Seng Index slumped 3.9 percent at the close in Hong Kong as markets reopened following a three-day trading closure, during which the MSCI All-Country World Index dropped 2.1 percent. The last time the gauge fell so much on the first day of the lunar new year, investors were worried about the health of former Chinese leader Deng Xiaoping...

Hong Kong’s benchmark equity gauge tumbled 12 percent this year through Friday amid concern that capital outflows, a slumping property market and China’s economic slowdown will hurt earnings. Tuesday’s violence in the shopping district of Mong Kok threatens to deter mainland visitors and worsen a drop in retail sales, according to UOB Kay Hian (Hong Kong) Ltd.

The Hang Seng index have been in a full blown bear market down 34.79% from its April 2015 peak.

Yet today's selloff had been broad based. Such selloff had already been signaled by recent developments at the property sector.

Last week, media reported that Hong Kong's property bubble have begun to hiss...

From another Bloomberg report

In a city that saw demand propel property prices to a record last year, the estimate that transactions reached a 25 year-low in Hong Kong shows how quickly sentiment has turned.

Home prices have slumped almost 10 percent since September and monthly sales in January fell to the lowest since at least 1991, according to Centaline Property Agency Ltd. Amid a spike in flexible mortgage rates this month and anemic demand for new developments, the low transactions volume for January is the latest evidence that prices have further to fall.

The point here is that frail conditions in China's economy has now spread to Hong Kong. Additionally, if equity markets performance of Hong Kong remains weak tomorrow, then this could foreshadow China's trading activities next week.

Worst, the feedback mechanism from Hong Kong's bursting property-stock market bubbles reinforces the emerging economic weakness that will amplify credit problems and which will feed on the ongoing asset deflation. 

So China and Hong Kong's fragile and deteriorating economic and financial conditions are likely to intensify and spread within the region.

Increased social frictions are likewise ramifications of a bursting bubble. The recent riots (called as "fishball revolts") are likely to escalate too.

And speaking of contagion from China, the Australian equity bellwether the S&P/ASX 200 fell into the bear market yesterday.

Today's .95% rebound has brought the index slightly above the bear market threshold. 

Yet this has not just been about contagion, but likewise signs of the unraveling of Australia's domestic asset bubbles.

More and more bourses have been falling into the clutches of the grizzly bears. The escalation of contagion only presages the imminence of a Global Financial Crisis 2.0.

Bubbles Everywhere: Australian Banks fret over credit fueled property bubble

No, I am not saying this, the Australian banks are.

From the Bloomberg:

Australia’s biggest banks, whose lending standards helped the nation avoid a property crash during the global credit crisis, are raising concern with home loans helping to fuel record house prices.

The proportion of mortgages that represented more than 80 percent of a home’s value -- the loan-to-value ratio -- rose in the third quarter to the highest since the second quarter of 2009,data from the banking regulator show. Mortgages in which borrowers pay only interest also increased to the highest in at least five years, according to the figures.

The Reserve Bank of Australia’s 2.25 percentage points rate reduction in the past two years is luring buyers counting on home prices, which jumped the most in three years in the 12 months through Oct. 31, to extend gains. As the proportion of risky loans climbs -- allowing some people to purchase homes who otherwise couldn’t -- lenders, home-buyers and mortgage insurers are more exposed to any decline in prices.

To give a perspective on what the article have been saying; when Australia’s interest rates had been 'pushed to the floor' in 2008, domestic credit provided by the banking sector markedly jumped.

Bank credit stands at 145.76% of GDP as of 2011 according to Trading Economics, this must be much higher today (update: 154.4% as per World Bank data 2012)

More signs of bubbles; Australian properties have have been transformed into objects of rampant speculation

From the same article. (bold mine)

Mortgages with loan-to-value ratios higher than 80 percent rose to 35 percent as of Sept. 30 at Australia’s four big banks -- Commonwealth Bank of Australia, Australia & New Zealand Banking Group (ANZ) Ltd., Westpac Banking Corp. (WBC) and National Australia Bank Ltd. (NAB) -- the highest since June 2009, according to the Australian Prudential Regulation Authority.

The average ratio at the major banks rose to 67 percent in the third quarter from 65 percent a year earlier and a low of 63 percent in the second quarter of 2009, according to Digital Finance Analytics, the data company.

“It’s not that we’ve changed any of our policies, but the mix of demand is changing,” Phil Chronican, chief executive officer of ANZ’s Australian business, said in an interview in Sydney on Nov. 27. “More people are trading up and people who trade up tend to go for higher loan-to-value ratios.”

ANZ’s average ratio increased to 70 percent in the six months to Sept. 30, from 64 percent a year earlier, according to regulatory filings.

The big four banks held 85 percent of the country’s A$1.2 trillion ($1.1 trillion) of outstanding mortgages in September, according to the banking regulator…

Aside from existing home owners trading up, investors are also piling in. In New South Wales, the country’s most populous state, investor mortgage approvals accounted for about 40 percent of all home loans by value, the highest since 2004, the RBA said in its semi-annual Financial Stability Review on Sept. 25. The average LVR on loans to this group has risen to about 80 percent from about 60 percent in 2009, according to Digital Finance.

Investors are betting on further capital gains after house prices started to rise in early 2013.

Australia’s property bubble (as measured by the NSW Sydney index as of March 2013) has coincided with a firming of the Aussie dollar…

This has partly been due to foreign funds chasing the property bubble…

 

The latter two charts represents the survey of foreign flows and the distribution of foreign flows in Australia based on a report conducted by the Financial Services Council and The Trust Company (2011)

And the property boom has been overvaluing the domestic factors of production. This has partly been manifested by the soaring of producer’s prices. The growth in Australia’s producer prices have been magnified since 2008

Australian productivity has grown by only 24% since 1998…

however, Australian wages has nearly doubled over the same period.

The differentials can be construed as the bloating of wage rates engendered by Australia’s bubble policies.

It’s not just a property bubble but could be a stock market bubble as well. The Aussie S&P ASX 200 now drifts at near recent highs post 2007. If measured by the ASX Ltd. or the Australian stock exchange, the firm's PE ratio stands at a dear 18.84 in the backdrop of zero bound rates

Properties and stocks which are titles to capital goods have been the main beneficiaries of credit inflation.

Bubbles can last until it collapses on its own weight or when the inadequacy of resources will get reflected on interest rates.

Yields of Australia’s 10 year bonds have been on an uptrend since Bernanke’s QE 3.0 in September of 2013

So Australia's banks have been right to worry, a sustained insurrection by global bond vigilantes threatens to expose on Australia’s massive malinvestments.

War on Savings: Australia Doubles Retirement Taxes

Crisis or no crisis, Cyprus may have set a trend for governments to seek ways to tax private sector savings. 

Australia has reportedly doubled taxes on retirement savings.

Here is the eloquent Simon Black of the Sovereign Man

Though Australia’s national balance sheet is comparatively quite strong, the government has been running at a net deficit for years… and they’re under intense pressure to balance the budget.

The good news is that Australia now has a goodly number of investor-friendly immigration programs designed to bring productive foreigners into the country, similar to the trend we’re seeing across Europe.

On the flip side, though, the Australian government has just announced new rules which penalize citizens who have responsibly set aside savings for their own retirement.

Any income over A$100,000 drawn from a superannuation fund (the equivalent of an IRA in the United States) will now be taxed at 15%. Previously, all such income was tax-free.

The really offensive part about this is that the government is going to tax people’s savings ‘on both ends,’ meaning that people are taxed on money they move INTO the retirement fund, and now they can be taxed again when they pull money out.

The Cyprus debacle drew a line in the sand– fleecing people with assets, or income, in excess of 100,000 dollars, euros, etc. is now acceptable. This is the definition of ‘rich’ in the sole discretion of governments.

And make no mistake– if it can happen in Australia, which still has reasonable debt levels despite years of deficit spending, it can happen in bankrupt, insolvent nations like the US.

We can see from the following charts why.

The Australian government has embarked on a spending spree since 2009. Australia’s fiscal balance has been deteriorating since.

This shows of the Emmanuel Rahm syndrome or Austrian economist Robert Higgs’ ratchet effect where crises have always been an excuse to justify government expansion.

And by doing so Australia’s government has been ramping up debt. External debt grew by about 30% since 2009, while debt to gdp has began to reverse from years of austerity or fiscal “discipline”. 

And as I have earlier pointed out, Australia has also been manifesting signs of bubbles

Australia’s credit to the private sector as % to gdp is now about 128%

 

While the banking sectors exposure account for 145.76% of the gdp in 2011.

And like almost every country, low interest rates have been a principal factor in driving credit expansion

Despite the above, Australia’s stock market has hardly recovered from the 2008 global financial debacle. (all the wonderful charts above are from tradingeconomics.com)

This means much of the credit expansion has been directed to the property sector, as measured by the phenomenal manic growth of housing prices (chart from vexnews). 

This proves that much of today's statistical economic growth have been Potemkin Villages

Yet once the global pandemic of bubbles pop, we can expect governments coordinate the dragooning of the public’s resources via more confiscation of savings to advance the interests of the political class via bailouts and more quack Keynesian fixes.

Of course this relationship will persist until people tolerate them. However, eventually the curse of the laffer curve will prevail or a financial repression (tax) revolt can also be an expected response.