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Sunday, April 22, 2012 11:19 AM

Point of No Return: "Australia is Screwed"

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Point of No Return

My friend "Brisbane Bear" from down under says ...

Hey Mish,

I think we are well past the point of no return.

Woolworth's, one of our biggest retailer/supermarket companies, just had their worst quarter in 13 years. Woolworth's is about as bullet proof a company as you can get in Australia. It is the bluest of blue chip companies.

The banks aren't lending and will pay one hell of a price when the economy implodes.

Brisbane Bear
"No One Is Borrowing"

Brisbane Bear passed along this article on The Age by Ian Vettender: Banks playing risky game with rates
Put yourself into the shoes of thousands of Australians who own small businesses across the country right now.

You're faced with a serious drop in demand for your product, and you need to get turnover moving quick smart, to start shifting that product off the shelves.

What do you do? You don't need to be versed in the subtleties of economic theory to work it out. The answer is simple. You cut your price, or at the very least offer a better, more competitive service.

That is exactly what is happening across Australia and throughout the developed world.

Our retail malls, once proudly displaying two discounted sales a year, now are permanently emblazoned with discount banners, promising 30 per cent, 50 per cent or even more off the "regular" price.

Our banks are faced with the very same dilemma. Month after month, the Australian Bureau of Statistics unveils figures detailing a drop in lending for new housing and for business, falls to levels not seen in decades, sometimes of a magnitude never before recorded. No-one is borrowing.

But the response from our lending institutions has run counter to the most fundamental laws of economics and logic and, in so doing, they may well be laying the foundations for serious financial problems for themselves and the nation.

Rather than cut their margins, and lower their interest rates in an effort to spur demand for new lending, they have spent the past few years raising the cost of money to existing customers to compensate for the lack of growth in their lending.
Misunderstanding Fundamental Laws of Economics

Vettender bemoans "lending has run counter to the most fundamental laws of economics".

Mish says, what a bunch of nonsense. Australian banks will not admit so, but they are capital impaired or soon will be (and they likely know it). I suggest banks have loans on the books that will not be paid back and they do not have adequate loan loss provisions.

Vettender notes: "a drop in lending for new housing and for business, falls to levels not seen in decades, sometimes of a magnitude never before recorded. No-one is borrowing."

Mish Theory of Unsound Businesses and Unsound Minds

Yes indeed "No-one is borrowing". Vettender cannot figure out why.

I offer this explanation to Vettender: Any Australian businesses in good shape (and in sound mind) would be out of their freaking mind to expand now. And they aren't.

However, desperate businesses deep in the hole as well as businesses struggling to stay afloat, just might want loans. The sad reality is many of those businesses will not survive, and some would not survive even on interest rates of zero percent.

Raising rates is the smart thing to do because only unsound businesses or unsound minds want loans!

Unfortunately this surge in rational behavior by banks is too little, too late, exactly the opposite of what Vettender proposes.

Australia is Screwed

In short, Australian banks are screwed, retailers are screwed, home owners are screwed, home builders are screwed, those long Australian stocks will be screwed, and those expecting strong commodity prices to bail out Australia will also be screwed.

For more on the latter, please see 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

Note that things would be worse, not better, if banks listened to Vettender, because at this point the greater the lending, the greater the losses.

So, if you get the general idea that "Australia is Screwed" then you have come to the correct conclusion.

Mike "Mish" Shedlock
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