The markets in terms of the interbank market and the swaps market in AUSTRALI have got it badly wrong.

okey dokey. I’m a little short of regional bank stocks at the moment. I suggest you go out and buy them as they’re yielding a decent rate and have fallen a long way.

Seriously, you ought to buy these stocks if you think everything is ok and you’ll make a lot of money.

I am talking about the swaps market ergo bank debt.

I never said you weren’t, Homer. the system is more than a little tense at the moment.

If you think Aussie banks are anymore riskier now than they were before the crunch then you are certifiable.

Banks are a call on the real estate market to some degree. Watch out if Stevens means business.

Markets are like referees they get thingsd wrong but you still have to play.

You don’t have to play.

The markets in terms of the interbank market and the swaps market in AUSTRALI have got it badly wrong.

A little, but maybe not as much as you think.

Global liquidity has tightened up. We always suffer when that happens. We’re boom rats , homer. We only do well world liquidity is ample.

I am talking about the swaps market ergo bank debt.

If you think Aussie banks are anymore riskier now than they were before the crunch then you are certifiable.

Markets are like referees they get thingsd wrong but you still have to play.

The markets in terms of the interbank market and the swaps market in AUSTRALI have got it badly wrong.

are you saying that Beppa, Babcock and Brown’s vehicle used to finance their takeover of Alinta getting funded at 8% (leveraging debt on debt) was normal or do you think it’s current price of 77 offering a yield to maturity of 16% is normal?

Call me old fashioned, but I reckon that in terms of the risk people were taking 8% is a pretty weird rate to accept. That’s about 1% over for a debt box sitting on another debt box. This just an example of what was going on.

I think the spreads reflect the current reality whereas the previous level was reflecting perfection and no defaults.

In other words this is a far more healthy state of affairs than previous. It will come lower over time maybe, but hopefully not to the previous levels. The only problem is that the de-leveraging is going to cause us some pain as we come down to ground level.

Homer, there was oceans of liquidity out there. Think about it, 12 months ago ALCO was flexing its muscles as part of a syndicate trying to takeover Qantas. We now see the firm lying on a stretcher, needing to explain to the market why it is leveraged about 7 times (from what i have heard).

You know we had these discussions before and you seem to poo poo the idea that we have been going through a massive monetary expansion. Well one of the symptoms of a monetary expansion is credit mispricing. Welcome to the real world.

the credit crunch is all about repricing risk.

Nothing has changed in Australia from pre-crunch to postcrunch re swaps market.

There is no rational reasson for swaps spreads apart from market panic

Fyodor’s answer in 46 is about right.

You say:

It is the Aussie market we are talking about here.

Yea I know, but I had a little more familiarity with the US spreads to say Ive seen that stuff at those extremes.

What’s you point though, homer, you think it ought to be wider?

Just kidding.

You wanna see pressure?

Babcock and Brown infrastructure (you love infrastructure, Homester) is trading at a yield of around 12% and Beppa the vehicle they used to buy Alinta at around 14.5%.

(note to SJ these are only approximate and in no way should you take my advice to buy these securities if I screwed up a little with the yields, so don’t yell at me if I’m out by 14 basis points yell at Citigroup as they deserve it).

Homer You work at a place that should get decent research.

Get Goldmans global liquidity indicator that measures global risk appetite. It’s a marvel to behold in terms of watching that thing open and close it’s jaws and the effect it has on the Aussie market

You’re arguing that Australian bank spreads should have risen relatively less because our banks are so much safer than foreign banks. Maybe – and I think you’re probably right – however the market clearly doesn’t agree with you at this point in time. I don’t think that’s terribly unusual. From what I’ve seen there are all kinds of credit mispricings apparent right now because market participants are panicking amidst a dearth of liquidity.

unfortunately that doesn’t answer the problem.

It certainly answers the problem in the USA and UK swap rates.

One might expect given the worries about Balance sheets in both countries if anything the demand for Aussie swaps would rise and the spreads would fall.

Financial markets have for a long time differentiated risk between comapnies and markets. It isn’t at present.

In terms of the line of banks lining up for funds the Aussie banks should be near the top of the queue.

To state the obvious in the US prime borrowers get loans at a lower rate than subprime borrowers.

Prime borrowers don’t pay the same rate.

It’s a global liquidity pool; our market is not isolated from US and European markets, and our banks rely to a material extent upon funding from offshore banks and debt investors. So long as the global system is hoarding cash, our banks will have to pay more – simple demand & supply.

The US bonds have nothing to do with this.

It is the Aussie market we are talking about here.

hit adswap 10 index and gacgb10dex hs and look at the spread and then consider whether it has normalised.

The major point is what happened in the US shouldn’t have happened here as there was no reason for it to happen.

I’ve seen the US 10 year at 10 basis points and 120 over. What is 92 so magical? It’s just higher than it was before.

just for your inflrmation any risk in the BBSW market is between banks.

So what, the banks have other options in terms of lending to each other. If things tighten up the credit risk of say st. George will widen to that of Westpac.

just for your inflrmation any risk in the BBSW market is between banks.

Swaps spreads are in essence the risk of Aussie banks.

so we have the liquidity premuim in the short end and also in the swaps market. As I write the spreads for 10 yr swaps over Gubbies is 92 bps.
That isn’t normalising at all.

here are legitimate reasons for counter party risk in both the USA & UK but none here.

Yea? MFS, that home lender (forgot the name), ALCO, smal regional banks funding far too much on the professional market. We’ve has our share of problems here too Homermeister. On top of that, we run a fairly large C/a which means things do stiffen up against us when global risk appetite jaws begin to tighten.

For Christ sake, you’re a market economist so you ought to understand these things better than I do.
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Under floating and the RBA’s domestic money market management, you can’t have a “liquidity” problem. You can only have “liquidity” issues under a fixed exchange rate regime. Liquidity problems can only happen (under fixed rate) when people are demanding foreign currencies with their domestic currency from the RBA causing RBA to sell bonds to obtain the funds to meet it obligations.

What we had/ have is a credit issue. People/ firms are concerned about counterpart risk and therefore will reduce lending to each other. This incidentally is normal in a changing environment that we have now compared to previously when there were oceans of global liquidity.

We have just seen the price of money rise to attract sellers (lenders). It’s a credit risk issue, Homer. The system (as I said earlier) cannot be long or short of cash, because Fred was good enough to advise we introduce a floating exchange rate.

Given Australian Banks profitability and very strong balance sheets and the fact no one is worried about any bad debt appearing anywhere there in no rational reason for the swap spread at present.

There sure is from both a historical and present day perspective. I would argue that the easy credit conditions of the recent past were the unusual period. We had junk debt could sold in the market at wafer thin margins to benchmarks! Two things are happening:

1. Counterpart risk is being reassessed.
2. Swap spreads to benchmarks are in fact normalizing

I will give you the benefit of the doubt and actually believe you understand what the liquidity premium is about.

Please state any reason you like why it exists in Asutralia.

Given Australian Bank’s profitability and very strong balance sheets and the fact no one is worried about any bad debt appearing anywhere there in no rational reason for the swap spread at present.

There are legitimate reasons for counter party risk in both the USA & UK but none here.

Im not going to bother checking anything in your last comment. I stand by my earlier comments, which Ill summarise here: Barrow-boy, spiv, nutcase.

Is this what the voice in your head is telling you to say J
You were wrong both times , so you ought to talk to that angry voice and tell it you want to show a little virtue like your opponent (moi) and admit mistakes. You have now made two incorrect assertions and refuse to retract or offer an apology.

Thanks SJ.

And remember to not speak to that voice in your head. lol.

In June 1932 the Dow hit a low of 43, down from the January high of 81.

So let’s pick the lowest rate for that dismal year and compare it to the highest rates we can extract for the later years that make those voices in your head think you’re right SL. LOL.

You know I thought you had something there and then I realized that i ought to check what you say after that abysmal attempt at lifting wiki and not even reading the last bits

I know I should go with the hunch as that angry voice always seems get the better of you especially when envy is involved. LOL.

The Dow opened at 244.2 on January 1st 1930 and closed at 615.89 on Dec 30 1960. Thats an astoundingly low 3.13% compound return for that 30-year period. So the point I made supporting Paul Fs contention was basically accurate in that the stock market performed dismally over that period (yes, you could broadly describe it as flatlined) and that the return would have higher investing in bonds. So as far as Im concerned 3% equity return over that whole period is dismal ( flatlined) in relative terms.

How bad? Well lets compare that the 27 years from 1980 to 2007.

The Dow closed on January 1st 1980 at 824.57 and closed on December 30 2007 at 13264.82. The return during this continuous bull market has been 10.83%: 350% higher than the same the 30 years after 1930.

Dont agree if the voice in your head tells you 1930/60 offered better returns, as it isnt true. Just ignore the voice, SJ.

Here, try to avoid the angry voices in your head and figure out the calculator by yourself.

http://www.measuringworth.com/DJA/

Now lets check to see what bond rates were doing 1930/60, shall we? Bond data from 1930 to 1960 shows that the return was 4.55%. In other words bonds returned a better rate than the stock market over that period.

http://www.measuringworth.com/datasets/interestrates/result.php

Just how low was this 30 year return? The life of the Dow from 1896 to end of 2007 show a return of 5.41% compared to 3.13% 1930 to 1960. Dismal again.

Note to self. Always check Angry Andersons facts as those voices get to him.

And thats two apologies now please along with the retraction.

In psychology, psychological projection (or projection bias) is a defense mechanism in which one attributes to others ones own unacceptable or unwanted thoughts or/and emotions. Projection reduces anxiety by allowing the expression of the unwanted subconscious impulses/desires without letting the ego recognize them.

In psychopathology, projection is an especially commonly used defense mechanism in people with certain personality disorders

* Paranoid personality disorder
* Narcissistic personality disorder
* Antisocial personality disorder
* Psychopathy

What are you taking for all those angry voices that speak to inside your head, bro. LOL.

Yea, I was wrong on that, I read that recently and I was mislead. thanks for correcting the error.

Any reason for the abuse though, or is the part of the front you show to disguise your issues with envy ridden non-virtues we recetly discussed on another thread?

I was wrong on the Dow and happy to admit it. I’m still waiting for the apology on that WiKi piece you lifted pretending it was your own and forgetting to read the last bits. :-) Go on admit it, you had no idea what it meant, did you?

I’ll have that apology and retraction please and do try to ignore that vioce in your head that tells you to say angry things. Tell the voice that when you’re right the facts will speak for themsevles.

…I believe the US stock market more or less flatlined from about 1932 to the early 60s until the Kennedy tax cuts. I may have read that it was the same here., but not sure.

In June 1932 the Dow hit a low of 43, down from the January high of 81.

By 1933, it was back up to 102. By 1938 it was up to 152. By 1950, 235.

1957, 509.
1958, 584.
1959, 680.
1960, 641.
1961, 731.
1963, 763.
1964, 875.

Some “flatline”. And by “Kennedy tax cuts” I assume you mean the Revenue Act of 1964. Remind be again what happened on November 22, 1963?

You’re a barrow-boy, Cambria. You’ve been in the industry, but you’re just a spiv. You know the language, but you don’t understand what any of it means.

JC you have completely missed the point.

Why Homes? Put you best paw foward on this one.

There shouldnt be any liquidity premium in Australia.

I’m not sure I agree, even for a bank that has Central bank support. If they fund a good portion of their book on the interbank market it does create a potential problem. In times of global uncertainty would you rather give your money to Westpac, CBA that has a pretty solid funding base or Bendigo bank that funds proffessionally. Your suggestion is extraodinary. You are suggesting there should not be any credit risk diferentiiation between the banks.

We had no exposure to CDOs , the Banks balance sheets were solid.

Doesn’t matter, it’s a global market these days.

Indeed if you look at swap spreads it is ridiculous.

Not at all.

Indeed if you look at swap spreads it is ridiculous.

The turn of the northern hemisphere was tight; libor was way up in spread terms. However we got though it and spreads are normalizing with interbank lending return to some normality.

you are right Fred there is no rational reason for any liquidity premium in Australia given the strength of their balance sheets.
You can understand counterparty risk in the Us and the UK but not here.

Well maybe some of our regionally based banks ought not rely so much on professional market for funding. They really should not be involved in some lending areas and seem to be asking for trouble. One semi large regional bank is heavily involved in margin lending while borrowing on the professional market.

What’s wrong with this covered bond market you keep annoying everyone about Homer? And stop annoying Fred, please. Sorry Fred, Homer does this sometimes. We dont know what the hell is the matter with him.
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Fred:
I think you will find spreads are actually not that far off their historical levels in terms of risk spread to Govies. Its actually healthy to have risk spread widening seeing that previously the market was pricing in perfection and zero default forever (only small exaggeration).