Winston's Charts

[boz]

Net International Investment Position
= net foreign equity + net foreign debt

Net Foreign Equity
= foreign asset equity (Aus ownership of foreign companies) - foreign liability equity (Foreign ownership of Aus companies)

Net Foreign Debt
= foreign asset debt (Aus foreign borrowings) - foreign liability debt (Foreigners borrowings from Aus)

ok, but net foreign debt is the debt of australians minus their credit that i presume is the holding by australians of deposit in different currency and probably in different countries, for example
if I or you have an account in euro or other currency that had changed in value during the last quarter ABS wouldn't be able to include that into its data, at least not on quarterly data and accurately. also banks assets and debts are not often listed on stock exchange and not possible to give correct valuation.
so, when i read 700 bil$ net foreign debt i see it as possible 600 bil or less or 800 bil or more.

 

[Ausprop]

Yep!
That's why we have a recession, current norm seems to be that credit will never end and debt can go up forever and repaying debt is no longer important.

only if you refer to bad debt. from my own investigations the general populice carries very little bad debt. I think the 90s allowed most people to get rid of it.

I do think there is an argument for a massive increase in rents tho, which would help service some neg cashflow invstments which could at present be classified as 'bad debt'. Govt intervention has distorted the market. We all pay for subsidised rents thru inflation. Tho the current nirvana is interesting - with unemployment there is no chance of inflation. then again the unfolding resources boom will see thta change very quickly.

 

[WinstonWolfe]

ok, but net foreign debt is the debt of australians minus their credit that i presume is the holding by australians of deposit in different currency and probably in different countries, for example
if I or you have an account in euro or other currency that had changed in value during the last quarter ABS wouldn't be able to include that into its data, at least not on quarterly data and accurately. also banks assets and debts are not often listed on stock exchange and not possible to give correct valuation.
so, when i read 700 bil$ net foreign debt i see it as possible 600 bil or less or 800 bil or more.

Have a read of this post earlier in the thread. Also check out the charts carefully. The international transactions of little people like you and I are covered in the current account by the green line and is called current transfers. It has very little impact on the current account because outgoings are pretty close to incomings.

Yes, investment in Australia by foreigners and by Australians in foreign economies, can be held in either currency. AFAIK, the greater bulk of these are accounted for in the BOP, to which the current account is integral.

 

[WinstonWolfe]

ALthough this thread was started as an analysis of ABS data, there's no doubt what is unfolding in China and the USA has a significant causal influence on Australia.

The charts below re US credit are telling indeed.
Source: Prieur du Plessis
Author: Niels Jensen, Absolute Return Partners.

The first reveals how far Greenspan and Bernanke let credit blow out to unprecedented levels, and how much further the US has to go on the deleveraging process.

The second shows what is going on is Clayton's deleveraging.....the deleveraging you have when you're not deleveraging......because what's going on is no deleveraging at all. Debt is just being shifted from the private sector to the taxpayer.

 

[HiEquity]

Hi WW

On the issue of the importance (or not) of CADs, BOT, NFD and NFE I highly recommend this reading. Best summary of the topic I have found in a long while.

 

[WinstonWolfe]

On the issue of the importance (or not) of CADs, BOT, NFD and NFE I highly recommend this reading. Best summary of the topic I have found in a long while.

thx for the ref HE.

I do understand the BOP and how CADs are funded by CAS trading partners, which is tabled in the 'Balance' of Payments.

Nevertheless, I think it quite academically slothful for Stein's camp not to elaborate the limitations of this view. If they think all CADs and NFDs are good, and FX can adjust perfectly under all circumstances, then they can't be taken too seriously.

A simple logic test I like to apply is to take a particlar generalist view to its logical extreme. In this case,

- is a sustained 100% CAD/GDP ratio plausible? obviously not. then what is a sustainable ratio?

- is a sustained NFD 100x the size of a country's saving rate plausible? I don't think so as what is the interest paid with?

The relationship between a CAD and ONE of its trading partners will rarely be strong enough to allow FX to perfectly counterbalance changes in strength of trade.

Finally, I appreciate there's two views on the sustainability and relative good of CADs. The CAD camp believe demand for foreign goods drives foreign investment by CAS economies in CAD economies. The CAS camp believe foreign CAS economy demand for CAD assets and dollar are the driver.

In real life, it will be a dynamic mix of both. But history and human nature, belies foreign investors hold foreign interest utmost, and therefore, foreigners are more likely to:
- be sure their investment can be returned, with interest
- suck a trading partner dry, then walk off to greener pastures.

History shows a combination of sustained CADs and NFDs have limits. The countries that have been able to sustain them, like Australia, are generally running down and selling off ownership of their natural resources and selling off the opportunity to use the wealth to diversify the nation's future wealth. Australia would reconsider its reliance on foreign investment if it applied itself more vigorously to using cash flows for innovative export opportunities.

There's only poor excuses from Australia, for not converting mining profits into becoming world leaders in telecommunications and solar technology/IP and pharmaceuticals.

 

[HiEquity]

Hi WW

Nevertheless, I think it quite academically slothful for Stein's camp not to elaborate the limitations of this view. If they think all CADs and NFDs are good, and FX can adjust perfectly under all circumstances, then they can't be taken too seriously.

I agree. They are deliberately provocative in that manner but for good reason I think as the debate is typically rather alarmist in the mainstream media when the amounts in question aren't all that material in the scheme of things.

A simple logic test I like to apply is to take a particlar generalist view to its logical extreme. In this case,

- is a sustained 100% CAD/GDP ratio plausible? obviously not. then what is a sustainable ratio?

Actually, in theory at least, using all your GDP to import goods and services is plausible. You can (theoretically at least) have no exports alongside lots of imports. It may be what you buy from the rest of the world is so cheap / value adding that it is more productive in your economy than it costs you. And/or the attractiveness of your local economy to foreign investors may be so high they may be willing to trade far more for your dollars than they are intrinsically worth - so why not make the trade?

- is a sustained NFD 100x the size of a country's saving rate plausible? I don't think so as what is the interest paid with?

This is a more difficult one but, theoretically again, it is possible that the investment in the right assets with that NFD could well generate more than sufficient future cashflows so as to be able to service ten times the interest bill, for the sake of argument. eg take Banana Republic A with a GDP of $1m / year. It invests in a massive world class mining project that requires NFD of $100m. This projects then goes on to generate $1bn in royalties per annum. Simplistic example but actually pretty relevant for a country like Oz...

In the case where the NFD isn't being used for such productive purposes then we have Stein's law: ie if a trend can't be sustained, it won't be! Simplistic I know and not very helpful after the event of course but there is a kernel of wisdom in there that you need to be very sure about the real importance of a perceived "high" NFD / CAD if all your other economic indicators are going swimmingly. Perhaps it can be sustained? Need to follow the money to work that out - not just go off the headline figure.

The relationship between a CAD and ONE of its trading partners will rarely be strong enough to allow FX to perfectly counterbalance changes in strength of trade.

Agreed - there are lots of factors at play in real life but I believe the argument is made ceteris paribus - in which case it seems to hold together? Of course you have to look at your CAD with that trading partner and that particular exchange rate to see the relationship.

Finally, I appreciate there's two views on the sustainability and relative good of CADs. The CAD camp believe demand for foreign goods drives foreign investment by CAS economies in CAD economies. The CAS camp believe foreign CAS economy demand for CAD assets and dollar are the driver.

In real life, it will be a dynamic mix of both. But history and human nature, belies foreign investors hold foreign interest utmost, and therefore, foreigners are more likely to:
- be sure their investment can be returned, with interest
- suck a trading partner dry, then walk off to greener pastures.

There are exceptions to every rule. I believe the truth is really that a high CAD may or may not be a bad thing and a high CAS may or may not be a good thing. You can't tell just by looking at the amounts involved - you have to look at what the funds are being used for on both sides. eg China may be building highways nobody drives on or Australia may be developing world class mining assets.

One thing often forgotten in this discussion is that manufacturing is a margin business. You can always get undercut by a competitor with cheaper labour. If you have resources in the ground that are the best quality and cheapest to extract then that can't be taken away from you, except by force or discovery somewhere else in the world (the latter being unlikely given the difficulty of new assets undercutting the cost of existing developments with their already sunk and depreciated cost base).

So China may be enjoying a nice CAS now but ultimately get undercut by Vietnamese / African labour when as they develop their population demands better wages / living conditions. So the CAS can be an indicator of a constrained future as foreign investors don't see the growth story they can get elsewhere. Pretty much what happened to Japan when China came along...

History shows a combination of sustained CADs and NFDs have limits. The countries that have been able to sustain them, like Australia, are generally running down and selling off ownership of their natural resources and selling off the opportunity to use the wealth to diversify the nation's future wealth. Australia would reconsider its reliance on foreign investment if it applied itself more vigorously to using cash flows for innovative export opportunities.

I agree sustained CADs have issues but so do sustained CASs. I think history most often shows a CAS occurs during a recession and a CAD occurs during strong economic growth so make of that what you will. If we can buy lots of high value goods at bargain basement prices off the rest of the world (we can and we are) then why wouldn't we? Others can do the manufacturing thing cheaper than us so let them do it. The value in making the trade can just as easily go to the buyer as the seller - it depends on the price.

There's only poor excuses from Australia, for not converting mining profits into becoming world leaders in telecommunications and solar technology/IP and pharmaceuticals.

True - more could always be done. However, Australia's economy, low government debt and high standard of living right now is second to none in the rest of the world so we must be doing something right. Mining and agriculture are real strengths for us so, given our small population, there is some logic in concentrating on getting those industries right...

 

[WinstonWolfe]

I am happy to debate this stuff with you HE. It helps guide my thoughts and reading, and clarify my views....

Further, I think it is extremely important that this stuff be understood well by the electorate and the polies.

IMHO, the RBA, treasury, govt etc should be making it more transparent and dumbing it down so the electorate can grasp it better.....that they don't make an effort is a sign of the patronizing view they hold Joe Average.

The electorate won't find the whole thing so emotive and alarming if they understand it. I originally thought Barnaby Joyce had a good hold on it after reading some of this thoughts and hearing him on the national press club a few weeks back. But then he comes out with some pretty alarmist language, and gets shut down by most because of the damage it could do in the markets. And he must not understand the nuances well enough to refute his critics.

But then again, I wonder how well the experts understand it. Their views on safe CAD and NFD thresholds have changed several times in the last 30 years. And consider the US authority's grasp of credit pre GFC.

as for you responses,

- a 100% cad/gdp isn't possible in my view.
If ALL of a country's annual production is being used to pay interest on foreign loans (income account deficit) and a trade deficit, then there's no production dollars left to spend on consumption, investment and government.

GDP = consumption + investment + government + (net exports).

The only way this might be made to work hypothetically is if foreign investment fuels C,I,G. But this isn't sustainable because foreigners would want a return on their investment, which creates a higher income account deficit, which increases CAD, which requires higher foreign investment. So basically, GDP would have to grow at the same rate as the deficit.

And my head needs a break to reflect the outcomes of that.


- regarding NFD, although I said nfd/savings ratio, I need to read more.
I just realized Luxembourg has a nfd/gdp ratio around 5000%!!!!

Obviously, the message there is foreign investors in a small or passive nation, can distort gdp based comparisons enormously.....GDP doesn't care who pays to produce it or where the profits flow......GNP does.

more later......

 

[HiEquity]

I am happy to debate this stuff with you HE. It helps guide my thoughts and reading, and clarify my views....

Likewise...

- a 100% cad/gdp isn't possible in my view.
If ALL of a country's annual production is being used to pay interest on foreign loans (income account deficit) and a trade deficit, then there's no production dollars left to spend on consumption, investment and government.

GDP = consumption + investment + government + (net exports).

The only way this might be made to work hypothetically is if foreign investment fuels C,I,G. But this isn't sustainable because foreigners would want a return on their investment, which creates a higher income account deficit, which increases CAD, which requires higher foreign investment. So basically, GDP would have to grow at the same rate as the deficit.

And my head needs a break to reflect the outcomes of that.

Of course we are talking about extremes and there is nothing realistic about that but keeping the discussion at the theoretical level, it really depends on whether the GDP value in our own economy of the imported goods / services / investment / NFD is greater than or less than the return demanded by foreign investors.

Much like the mining example I gave before for Banana Republic A, it is possible to run high or extreme levels of trade imbalances and still make more from those transactions than they cost us. I'm not saying that's what Australia is currently doing of course - I haven't done the necessary research to figure that out.

Only trying to highlight that high or even "extreme" CADs and NFD aren't necessarily "bad" if used for the right purposes. In other words, who is actually getting ripped off - the country buying the computer / truck / equipment / call centre services for bargain prices or the country buying our dollars in exchange for them? Who extracts the most value from the exchange for their economy? You can't tell just by looking at the amount of the exchange itself - you have to look at the value created in comparison to the price paid.

A bit like buying IPs - in the case of Toorak mansions it seems the value goes to the seller (not such a good investment as you're buying a strongly negative cash flow) but in the case of positively geared places the value probably lies with the buyer (ie a good investment). So there are "good" and "bad" investments for individuals and likewise "good" and "bad" CADs / NFD for nations. One investor can be sitting very comfortably with $50m debt while another can be completely underwater with $500k debt - the amount of the debt itself is no clue to the health and sustainability of the situation.

At least that's what I think...

 

[WinstonWolfe]

You can't tell just by looking at the amount of the exchange itself - you have to look at the value created in comparison to the price paid.

I agree totally on this. There's a big diff between importing productivity goods (like farm and mining equipment) and discretionary goods (like speed boats and trinkets).

And a big diff between borrowing to build gold coast high rise apartments versus better universities and mines......

And an even bigger diff between borrowing to build the mines ourselves, or selling the mining rights to foreign interests.

Though when I mention 'sustainable', I innately imply the above.

 

[Intrinsic_Value]

I think you guys worry too much about 'what ifs'.
The market will generally take care of itself.
Sometimes there can be significant delays, but generally the market wakes up sooner or later to inefficiencies/imbalances etc.

Dont get me wrong, its good that you are identifying these points, hopefully you will incorporate these risks into your investment strategies.

But sitting their chewing your nails off with the thought that the world will come to an end: well it wont happen. Mankind will adapt to changing circumstances, we always have and always will.

The only piece of advice i can give is:
Dont listen to economists and especially dont build your strategic investment plans on their thoughts.

There are always opportunities and money to be made, but the key in my opinion is to realise that upon structural change, the previous key to making money is unlikely to be the future way of making money.

 

[WinstonWolfe]

I think you guys worry too much about 'what ifs'.
The market will generally take care of itself.
Sometimes there can be significant delays, but generally the market wakes up sooner or later to inefficiencies/imbalances etc.

Dont get me wrong, its good that you are identifying these points, hopefully you will incorporate these risks into your investment strategies.

That's the idea IV.
It is not so much about what ifs, as about understanding fundamentals.
There's not enough educated debate about it in Australia, or anywhere.....and we'll all be better off for understanding the forces that drive today's global economy.
If I was more confident of my theories, I could have made enough money to retire in the last 4 weeks.

 

[Intrinsic_Value]

The problem is that that 'time is money'. Todays people dont want to reflect, they want results, including quick fixes to problems that sometimes just require time to heel (ie the current GFC).

Its really quite funny.
From my side, which is long only equities (ie i dont engage in any long/short positioning), anyone with exposure to equities should already be aware that this stage of the market recovery results in earnings growth, but substandard pricing expansion, ie we have already had the PE expansion and now we need to see justification of earnings.

This has been highlighted in numerous institutional material already (the basic high level equities performance charts over the course of an economic cycle).

'Experts' should be aware of it already and should have already considered it in their strategic planning.... but noooo... whilst it appears as a nice talking point when raised, Mr Market as usual was focusing on short term issues.

Now suddenly everyone is worried again, markets are down 10% odd.
Well dahhh, we are now in the second stage of the market cycle, if you are still operating in the first stage of course you are going to get burnt.

I'm not just talking about retail investors here, i am talking about the so called 'experts' the ones who are managing YOUR MONEY.

These 'experts' instead of believing in themselves (so long as they actually are experts) are falling for the quacking duck syndrome. The same syndrome i was warning people to ignore throughout late 2008 early 2009.

 

[WinstonWolfe]

I don't necessarily agree this recovery will emulate all others.
However, my charts say we've got a bottom consolidating, so I'll be the DCAing I started this week, and will ride the trend until it ends.

I think China's credit contraction announcement effect is stabilizing.
And batman and robin showed up to save Europe.....until the next bat episode.

Am keeping a close eye on my leaders - BDI and SSEC.

edit: Yup just confirmed Batman and Robin are saving Europe. guess where the markets are going tomorrow

 

[WinstonWolfe]

Rethinking Macroeconomic Policy

This is a very important IMF paper relative to how central banks will be encouraged to evolve monetary and fiscal policy over the coming decade.

It basically consents that a high inflation rate is now kosher.....How convenient for the developed world that the IMF believes it ethical they inflate away their debt to emerging economies.

 

[topcropper]

- regarding NFD, although I said nfd/savings ratio, I need to read more.
I just realized Luxembourg has a nfd/gdp ratio around 5000%!!!!

Obviously, the message there is foreign investors in a small or passive nation, can distort gdp based comparisons enormously.....GDP doesn't care who pays to produce it or where the profits flow......GNP does.

more later......

Wow, I see Luxembourg owes nearly 2 trillion dollars, divided by roughly half a million people..???

They have a GDP per capita nearly twice ours at US.$77,600 per person and right up there with the world's highest. Yet, of only half a million residents, only 75,000 actually are employed, the rest of Luxembourgs labour is provided by foreign cross boarder workers from Belgium, France and Germany.

From,...
https://www.cia.gov/library/publications/the-world-factbook/geos/lu.html




Is Luxembourg a giant tax rort haven for the wealthy and retired or something?

A bit like Liechtenstein and Bermuda and some other places? Probably means it's economic figures are irrelivant. A bit like saying Gold Coast houses are overvalued compared to the wage rates there, when a hell of a lot of Gold Coast residents are wealthy and retired.


See ya's.

 

[WinstonWolfe]

Wow, I see Luxembourg owes nearly 2 trillion dollars, divided by roughly half a million people..???

yeah it is tax friendly -> Europe's major centre for banking and insurance.
Many international companies have their global or european headquarters there, which increases foreign investment in it.

GDP is high because of the contribution of these foreign companies.
But high foreign investment in Lux also increases foreign debt. If Lux doesn't invest heavily externally, it is apparent why they have high NFD.

This raises one of the shortfalls of measuring an economy's success via GDP. GDP is the total production that occurs within a nation's borders, irrespective of whether the production is by domestic or foreign companies. But GNP differentiates, so it is a better measure of a nation's wealth.

To me, Lux exemplifies why the Australian belief that a larger population is necessary for economic wealth and growth, is erroneous. (The main reason Australia needs a larger population is to have more cannon fodder if we ever get attacked.)

There's no reason why we couldn't do what Lux, Saudi, Sth Korea, USA and Japan do if we want higher productivity - grant temporary working visas. Some would argue this is racist or blah blah blah.

However, it could be argued temp working visas have a more humane outcome. How so?

When we have an economic downturn, or run out of minerals, working migrants who become unemployed, can go home with their booty. This would make their homeland wealthier, and if that wealth was spent wisely, those countries could develop faster....

But I doubt it is an argument the moral high grounders could get their one eye around.

 

[WinstonWolfe]

Bill Gross' march 2010 outlook resonates deeply.

 

[WinstonWolfe]

Sovereign Debt Ratings - leading, contingent, or lagging indicator?


........................

 

[WinstonWolfe]

My New Hot Spot Indicator

Man, I was excited last night when I cottoned onto a new piece of functionality realestate.com.au has recently added.

That info is their supply and demand graph on the 'suburb data' page.
It's value mightn't seem that obvious to some. But I've thought about it and played with it for a couple of hours now, and I think it's a very valuable piece of data. There hasn't been anything available like this previously.

What I did last night was compare a whole lot of suburbs, by dividing user sessions per suburb by property listings per suburb. Some seriously interesting insights emerged. I will continue to track it over time to see if it enlightens in the way I expect it to.

I am not inclined to say more, as I think it offers a real advantage in understanding supply/demand dynamics.....and I suggest everyone interpret it themselves.