Notes From NAB Business Banking Breakfast

Hi,

I attended a business banking breakfast hosted by the NAB (back in March mind you) where their chief economist made a presentation about the economy. I made these notes that may be of benefit to you:

In General

1. Since November, world equity markets are down approx 30%
2. US is in the eye of the storm; Europe Slowing; China, India, Latin American and Australia not showing slower growth yet.
3. Consumer sentiment is changing from greed to fear

US Economy

1. Going through a 'good old fashioned housing bust'
2. Approx 20% more homes exist than are needed
3. 9 month supply of housing presently for sale
4. Previous huge boom in housing (when cash rates were 1%) – now prices are negative or flat. Those cities with the biggest overbuild in the boom are now under the most pressure.
5. California's economy is bigger than Germany's.
6. Data shows that for every $100k houses appreciate in value, consumers spend $10k of that on lifestyle
7. Wealth effect occurs where people stop spending money once they believe their assets are worth less.
8. New term – class of borrowers: NINA (no income; no assets)
9. Distressed sales on the market now just add to the nine month over supply
10. Banks pooled up debt and sold it around the world as 1st mortgage-backed security.
11. Question: what are these debts now worth in the face of defaults? 80 cents in the dollar; 20 cents?
12. Estimated about $400b of bad debts. Currently $170b brought to account.
13. Could result in a credit crunch where banks stop lending, as a fall in the value of their loan book requires greater liquidity to preserve prudential liquidity ratios.
14. Aussie banks now paying 60 pasis points above RBA rate; in 2006 it was 10 basis points above
15. US Fed now playing the role of crisis manager. They are worried about big banks falling over

NAB Forecast

Predict slowing but no crash for Aus, but models will not be accurate if:

A. House prices fall by 10%; or
B. Equities fall a further 20%; or
3. Oil remains unchanged at $110US a barrel

1. Expectation that tighter credit will slow the economy
2. Increasing Euro is placing stress on European exporters
3. Aus economy has passed its peak, bust still doing well
4. Moderate slow down – no 'off the cliff' drop
5. It takes between 12 and 18 months for interest rate pain to flush through economy

Housing

1. House price growth forecast at 4% (down from 12%)
2. There is an undersupply of housing and rentals in Aus
3. Profits will fall though as interest rates increase – a tougher environment for all
4. Forecast RBA to cut rates by 1 to 1.5% within 12 months
5. House prices driven by: population growth; income growth; interest rates
6. In Aus, 70% of household wealth is held in the value of their home

All the best,