The Mad Policy Hurting Banks Worldwide

Today’s Money Morning asks you to put aside the stories about China, oil, gold, and the swings in the stock market for a moment.

They’ve been done to death everywhere.

But did anyone highlight for you the news out of Florida?

It could prove to be more important…

A bellwether state for the world’s biggest economy

The Herald-Tribune reported earlier this month that foreclosure inventory was down 41% year on year for the Sunshine State. This inventory measures the number of homes at some stage of the foreclosure process.

Florida is in the the top four US states when it comes to foreclosures. This is the long tail of the 2007 subprime collapse still wagging after all these years.

The fact that these are slowly being hoovered up shows the US recovery is genuine. It’s also releasing a lot of Americans from the negative equity they became trapped in after 2008.

High employment is the strong tailwind behind this. To give you can idea of how strong, CNN Money even suggested the US has too many job openings.

According to the US Labor Department, there were 5.6 million job openings in December, just below the all-time record of 5.7 million.

Companies can’t satisfy all the demand because of skill shortages. Why on earth anyone thinks the US will go into recession when this is the case is a mystery to me.

The mad policy hurting bank recovery

We can see this recovery playing out in Europe too, if in a different way. The Financial Times reported yesterday that last year there were over $100 bln in loan sales.

Or as the paper puts it, ‘investors continue to chip away at the debt that has hamstrung the continent’s banking system since the crisis.

That $100 bln figure is the highest level since the financial crisis, according to data the FT quotes from KPMG. This significant activity is forecast to keep running for the next couple of years.

This process is important. It will make Europe’s banking system healthier.

What’s blurring this issue however is the additional costs banks now have to cope with in the countries with negative interest rates.

That effect of that process on the banks’ loan growth is not completely clear at the moment.

All I know is it will raise their costs and depress the spread they make. That’s hurting bank shares all over the world right now.

What’s even more bizarre is the central banks doing it are hurting their own banking systems more than anything else.

The Bank of Japan’s decision to use negative rates will most likely drive the country into recession again.

Hungary of all places is proving one of the shrewdest. Bloomberg reports that the central bank of the country plans to start buying non-performing commercial loans.

This will clear out the bad debts in the Hungarian banking system. At a basic level, this is what all the countries with a backlog of bad debts need to do to create a recovery.

The fact that central banks are using negative interest rates suggests another agenda — one of their own. It certainly not to help the wider economy to recover.

So what, then?

Whatever that may be, at least Australia, for one, does not yet have negative interest rates. And there’s plenty of development happening right here to keep the wider economy ticking along.

That’s from both the private and public sectors.

Aussie developments on the drawing board

You only have to take a look at the projects mentioned in the Australian Financial Review this morning.

Currently, Transport NSW has an expression of interest campaign closing this Friday to build a light rail network in Newcastle.

Not only that, the NSW government has shortlisted four developers for the $300 million plus development of land at Wentworth on the Parramatta River.

Those look like chicken feed compared to listed developer Payce’s $5 billion mixed use plan for Melrose Park.

According to the paper:

Payce, together with its joint venture partner Sekisui House Australia, on Wednesday lodged a structure plan and planning proposal with the Parramatta City Council.

The plans for the 30-hectare former industrial land include 5000 apartments, public parks, a shopping village and a new aquatic centre.’

A little further south, private developer Grocon wants to team up with AFL club Western Sydney in an $800 million redevelopment of Manuka Oval in Canberra.

We also have companies reporting their half yearly earnings at the moment.

Take residential property developer Villa World [ASX: VLW], for example.

It just reported a 57.2% rise in in net profit, with revenue up 49%. And it also raised its dividend.

VLW saw strong growth from sales in Melbourne and South East Queensland, according to The Australian Financial Review.

All in all, this result is consistent with what we’ve been saying over at Cycles, Trends and Forecasts about the property market being stronger than many people think.

Go here to see why it can run for a long time yet.

Best wishes,

Callum Newman


Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors.

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