Archive for the ‘Analysis – Business’ Category

Are tablet computers flash in the pan?

Sunday, April 17th, 2011

Today, we will divert away from our usual discussions on the macro-economy and look into a big picture trend in the field of technology. If you are looking into investing in technology stocks, this article will give you food for thought…


There is no doubt that Apple’s iPad is a roaring success. Indeed, they are so successful that almost the entire consumer electronics industry is throwing its weight behind the concept of tablet computers. Apple is so successful that it is almost believable that they are the pioneer of the tablet computer.

But the truth is that, Microsoft was in fact the pioneer of the tablet computer.

Before 2000, Microsoft already had a stylus operated pocket computer operating system (Windows CE). As early as 2005, Microsoft was already producing tablet editions of their Windows XP operating system for the first tablet computers. But as we all know, Microsoft?s tablet computing initiative was eventually abandoned and left in the recycle bin.

Then Apple came up with their iPad in 2010. Conventional thinking predicted that the concept of this tablet computer cannot be a success. Physically, its size makes it less portable than Apple?s highly successful iPhone.

Functionally, it cannot do half the things that a netbook computer (that runs Microsoft?s Windows operating system) can do. Therefore, conventional logic says that since Microsoft?s tablet computer failed to take off, then the iPad should suffer the same fate as well.

But amazingly, Apple?s iPad defied conventional logic and became an incredible success?so successful that the entire industry is following the tablet computer bandwagon.

Meanwhile, Microsoft, having failed once with their table computer initiative, was tiptoeing timidly on this bandwagon. As this article reported,

As virtually the entire consumer electronics industry throws its weight behind tablet computers, Microsoft’s global chief research and strategy officer Craig Mundie said today that he did not know whether the booming new category was here to stay.

Speaking at a lunch held in Sydney by the Committee for Economic Development of Australia (CEDA), Mundie, who reports directly to Microsoft CEO Steve Ballmer, said he did not know whether tablets like the iPad would “remain with us or not”.

For this reason, we believe Microsoft is making a major strategic blunder. They have completely failed to read and understand the consumers. In other words, we believe the tablet computer is here to stay and it will continue to grow into a major part of the industry. In fact, recent reports from IDC and Gartner find that tablet computers are cannibalizing the PC market. We believe this trend will continue for quite a long while. Therefore, Microsoft?s continued timidity will see that it will become irrelevant in that part of the technology industry in a few years time.

So, you may wonder why we are so sure of that.

To understand our why we think so, we have to look at this trend from two perspectives?one from the technologists? view and the other from the consumers? view. Since the wish of the consumers will ultimately decide the fate of the industry, we will, it will be the one that is relevant for investors.

Firstly, let?s look at it from the technologists? point of view. As we mentioned before, the tablet computer is not as portable as the smart-phone and not as functional as a full-fledged PC (including netbooks). We may be able to carry a smart-phone with us wherever we are, but not for a tablet computer. There are still many things that we cannot do on a tablet computer. For example, we cannot imagine ourselves writing this article on a tablet computer by tapping continuously on a screen with our fingers. We doubt it is possible to professionally edit videos and photos on a tablet computer. Neither can software be engineered on a tablet computer yet. In other words, from the technologists? point of view, the tablet computer is a half-baked computer compared to the PC.

Now, let?s look at it from the consumers? point of view. The average consumer does not care about the underlying details of the technology behind any gadgets they use. All they care is that the gadget must work instantaneously and reliably anytime they need to use it, according to their expectations. For example, whenever they turn on a tap, they expect water to flow out of it 100% (well, almost) of the time. Whenever they press a button on the microwave oven, it works 100% of the time. When they press the button on the TV remote control, they are able to watch their favourite TV programs in less than a couple of seconds all the time.

But when it comes to the PC, the consumer often sees it as an unreliable, slow and frustrating piece of crap. Most of the time, the PC works adequately. But it has a frequent habit of stymieing the progress of the consumer with incomprehensible and unexpected error messages and other kinds of show-stoppers. That mars the consumer perception of the PC as unreliable, slow and frustrating. The consumer wants his electronic gadgets to be as reliable and instantaneous as his everyday kitchen appliances, without any unwanted surprises.

Unfortunately for the consumers, they are denied this want since the very beginning. They do not know of an alternate universe where computers are gadgets that are a joy to use and can be relied upon as much as their everyday kitchen appliance.

Out of the blue, Apple came up with the iPhone and then followed by the iPad. The consumers suddenly realized that such an alternate universe exists after all! Computers are reliable, instantaneous and work without unwanted surprises after all! They can manipulate objects ?inside? the computers with their bare fingers as if they are manipulating objects in the physical world. Finally, computers are joining their collection of everyday appliances. No, a correction?the tablet computer is no longer a computer anymore. It has become an appliance.

When you look at this from the consumers? point of view, you will then understand why tablet computers are displacing PCs. Once consumers have a taste of that alternate universe, they prefer to stay there. No doubt, tablet computers are not as fully functional as the PCs. But for the average consumer, it is able to do most of what they want to get done. For the things that cannot be done on the tablet computer, they will grudgingly return to their PC.

For now, the capability and functional gap between the PC and tablet computers are wide. But as time goes by, with more and more software being developed for the tablet computer, the gap will narrow. As the gap narrows, more and more consumers will ditch the PC altogether (maybe more and more of businesses? workforce will be dragged along into the alternate universe too).

For Microsoft, their existing Windows operating system has too much baggage of the past to be brought to the alternate universe. In fact, in their reluctance to cannibalize this platform in order to preserve compatibility with the past, they are attempting to fit semblance of the alternate universe into the current universe with their upcoming version of Windows. If they continue along this path, we are afraid that Microsoft is sliding towards irrelevance.

How the government rip you off with hidden taxes when you go shopping

Sunday, December 19th, 2010

In Australia, one of the major secular trends that is happening is the growth of online shopping. More and more consumers are discovering the joys of bargain hunting through the Internet, thereby bypassing the traditional bricks-and-mortars retailers in the local shopping malls.

One of the pet complaints by Australian retail businesses is that they are unfairly burdened by the need to pay GST. Australian consumers avoid GST by buying from overseas web site. Worse still, the strong Australian dollar makes overseas products even cheaper.

So, is GST really the root of the problem for Australian retailers who find themselves increasingly unable to compete with foreign web sites?

Well, let’s hold a thought experiment. Imagine that all the goods at your local retailers are reduced by 10% (which is the GST amount). Will that make your local retailers more competitive than their overseas online competitors? Will that make you switch from buying from overseas web site to your local retailer? If the answer is “No,” then it means that we have a structural problem in Australia.

For one, consumers are complaining that the range of products sold by our local retailers are too small. In other words, they can’t get what they want locally and therefore, have to shop in foreign web sites to get them.

More importantly, many goods sold by foreign web sites are very much cheaper than identical ones sold at your local shopping mall, even after you include shipping costs. For example, when you compare the prices at your local Dymocks bookshop and Book Depository, you will find that the latter is much cheaper (by the way, if you shop at Book Depository through our link, you will help us and help yourself financially). That means that even if the government can somehow enforce GST on foreign online retailers, our local retailers will still bleed.

So, if you accept the theory that this is a structural problem, what could it be? Recently, we found this very interesting comment that may possibly answer this question,

How can local retailers compete with overseas retailers when their operating cost here are significantly higher than overseas. The biggest single cost, after labour, is commercial and retail rents, which are at least 50% higher here than overseas … this is reflected in the price of the goods.

The enquiry should centre around why retail rents have skyrocketed in Australia, and why the institutional property owners force retailers and small business to pay extremely high rents. Try starting a small business here when you have to pay $200- $400 per sq metre in suburban Sydney, yet in the US, the same premises rent out for $50 – $150 per sq metre.

The Government is complicit in that it has a vested interest for property values to be as high as possible to ensure the land tax revenues keep coming in … Australians are being taxes artificially at all levels in the community .. from the goods they buy to the cost of electricity .. behind all of these costs are hidden government fees.

So, this is another example of unintended consequences of the property bubble in Australia.

What’s the biggest threat to Google?

Thursday, October 22nd, 2009

Following from our previous article (see Google vs Rupert Murdoch- who will win?), we will look at what is the biggest threat to Google. For those who are interested in investing in the technology sector, this is one of the things to watch out for in your business analysis because it will have major flow-on implications on other technology and media businesses in the long run. For those who are thinking of starting an Internet/technology business, it will determine which sides of the dividing line (information as commodity vs free and expansive information) that you will be supporting (or switch sides to).

For starters, Microsoft’s new search engine, Bing, is not the biggest threat. Bing and Yahoo! are there to keep Google competitive, but they don’t pose a long term strategic threat to Google. So, assuming that information will remain free and abundant for the foreseeable future, what can deal a long term mortal blow to Google?

Remember, in our previous article, we wrote that

… information (collectively) is free and abundant, but consumers’ attention (for each individual information provider) is scarce.

And here is the beauty of Google’s business model- it sells access to consumers’ attention.

For a rival to erode the long term competitive advantage of Google, it must be able to:

    1. Steadily gain more and more attention of consumers over the years
    2. Shut out Google from what gained the attention of consumers

    Any rival that can fulfil these two conditions will undermine and erode Google’s capability to sell access to consumers’ scarce attention. Microsoft’s Bing may be able fulfil the first criteria, but it cannot fulfil the second one. After all, the search engine robots of both Google and Bing trawl in the same playground of freely available information.

    But there’s a potential rival in the horizon that fulfils both conditions: Facebook.

    At first glance, Facebook and Google seem to compete in two different market space. Some may argue that they complement each other. But there’s one problem for Google- its search engines cannot penetrate through the wall of Facebook and index the consumer-generated content. With each of the 300 million Facebook users who can potentially interact with each of the other 300 million users (via status updatess, posting and commenting of pictures, engage in forum discussions, play games and so on), plenty of content are generated everyday that is outside the view of Google.

    Then there’s a disturbing trend that may perhaps be happening right now- as people spend more and more time in Facebook, more and more ‘Internet’ activities are migrating towards it, which in theory can make it an ‘Internet’ within the Internet (we will call the former “Facebook world” and the latter “public Internet” from now on). For example, as Facebook contains more and more interactions between people, more people are using Facebook messages in favour traditional emails to communicate with each other. We can imagine a possible future where Facebook messages supplants traditional emails. Also, it is already possible to host forum discussions at Facebook groups within Facebook world, which in theory, can replace public Internet forums. Software developers can also develop Facebook applications, which in theory, can function as services (in Facebook world) normally found in the public Internet (which is the domain of Google). For example, what is stopping Facebook to host blogs, polls, newspapers, forums and other content inside Facebook world?

    Facebook is also intruding into the public Internet. Through its Facebook Connect feature, people can bring their Facebook identity into the public Internet to take part in discussions, which can then be tracked by Facebook. This feature serves to draw people from the public Internet into Facebook world.

    Obviously, Google has already seen this threat as you can see from this article. We believe that it is no coincidence that Google’s next big idea product, Google Wave, is a competitive threat to Facebook’s social media function.


    Meanwhile, for those interested in trading the technology stocks, our friends in Market Club has this to say about Nasdaq- Is the NASDAQ Now in Thin Air?.

    Google vs Rupert Murdoch- who will win?

    Tuesday, October 20th, 2009

    We all know that News Corp’s Rupert Murdoch hates Google. Six months ago, he launched an attack on Google,

    Rupert Murdoch threw down the gauntlet to Google Thursday, accusing the search giant of poaching content it doesn’t own and urging media outlets to fight back. “Should we be allowing Google to steal all our copyrights?” asked the News Corp. chief at a cable industry confab in Washington, D.C., Thursday. The answer, said Murdoch, should be, ” ‘Thanks, but no thanks.’ “

    Google, with its huge armies of software robots and off-line human agents (e.g. the book scanning project, Street View), is like a huge vacuum cleaner that tries to suck in the entire world’s freely available information in order to index, analyse and categorise them.

    The end product of their effort is a wealth of meta-information (information about information) and information in which they grant access to the masses through their famous search engine (and other lesser known information services). In this information saturated world, the divide between the haves and have-nots lies in the line between those who are information-rich and those who are information-poor. Google, with their wealth of meta-information, is the gate-keeper for those who wants to cross from being information-poor to information-rich.

    Paradoxically (counter-intuitive, we would say), unlike conventional businesses, Google does not charge for access to their meta-information (who pays when doing a Google search?). For example, a large percentage of you reading this blog are brought here free-of-charge by Google’s search engine. Interestingly, you may notice that Google provides all kinds of free services (e.g. Gmail, Google Maps, Google Doc, Picassa, Google Reader, Blogger, YouTube, etc). So, how on earth does Google makes its money if it is giving things aways for free?

    To understand this paradox, we have to appreciate the entrenched position taken by two diametrically opposed camps in the digital world. We will requote Graeme Philipson from an article we wrote three years ago (see Analysing Web 2.0 businesses: Shoutwire vs Digg case study),

    We are not even a decade into the digital millennium and already the battle lines have been drawn. Two camps have emerged, each with widely divergent views on the nature of information, who owns it and how it should be distributed.

    The forces are at this stage evenly matched, and it is not apparent from the day-to-day squabbling which side will emerge victorious. But one side must, because their views are diametrically opposed and can?t coexist in the long term.

    On one side are those who believe information is a commodity that can be owned, bought and sold, and its distribution controlled. This naturally leads to a restrictive view of information. This group comprises most of the music, publishing and film industries, and most hardware and software companies.

    On the other side are those who believe that information by its nature should be free, and that its distribution should be uncontrolled. This viewpoint naturally leads to an expansive view of information. This group comprises the open software movement, a few far-sighted computer companies (Google is the best example, but also includes heavyweights such as IBM and Sun), and most consumers.

    Naturally, businesses that deal with digital information (e.g. data, music, software, movies, etc) will take the view that information is a commodity. Famous companies in this camps include Microsoft, Apple and as expected, Rupert Murdoch’s News Corp.

    On the other side, most who belong there (i.e. those who believe in free information) are not profit maximising businesses- they consist mainly of consumers (of course, who do not like free information, music, movies and software?) and non-profit open-source movement. Very few profit maximising businesses belong to this camp- the big names include IBM, Sun and the 600-pound gorilla, Google.

    So, at the very heart of Google‘s business model is the idea that information is free and abundant. Think about it: if information becomes a scarce commodity, Google’s business model will collapse- its ubiquitous search engine will die a natural death as it will not be able to index restricted information. Without its search engine, Google’s monopoly will cease and its revenue will dry up. That’s why Rupert Murdoch’s attack on Google is akin to trying to drive a stake at its heart.

    Now, let’s take a look at current reality. It’s true that most information is free (at least for the non-specialised ones that the masses are after). This blog that you are reading now is an example of free information. It is also true that there are too much information available than you can consume. For example, there are millions (okay we made that number up, but you get the drift) of investment blogs that can supply everyone with ideas, news and regurgitation of facts and figures and are vying for everyone’s attention.

    So, here comes the crucial point to understand: information (collectively) is free and abundant, but consumers’ attention (for each individual information provider) is scarce. Actually, each feed of one another in a positive feedback loop- to attract the attention of consumers, businesses are forced to give more and more information away, which in turn causes information to be more abundant (collectively), which in turn makes consumers’ attention even more scarce (for each individual businesses), which forces businesses to give yet even more information away.

    And here is the beauty of Google‘s business model- it sells access to consumers’ attention. For example, at any Google search results, you will find paid advertisements on the top and at the side. By using Google’s search engine, your attention is captured by Google. Then as you click one of the search results, you may stumble into say, this blog site. Here, we have captured your attention that we sell to advertisers, either directly or through Google. So, why is Google giving away so many free services (many of which are integrated with each other), so much so that you can even organise your life around it? The short answer is that it is trying to monopolise more and more of your attention within its domain.

    Now, let’s look back at Rupert Murdoch’s plan of bringing paid content into his agenda. Will his plan work? By introducing paid content, News Corp will lose the attention of millions of consumers who are not willing to pay. Not only that, the Google search engine will no longer be able to index and analyse News Corp’s information. That means it will lose even more consumers’ attention through the loss of search engine traffic.

    In a world where information is free and abundant and attention is scarce, that attention vacuum vacated by News Corp will be filled quickly by other information providers. In fact, this will be windfall for them and a mortal blow for News Corp. If News Corp attempts to make up its loss of attention by improving the quality of its information tremendously, no one will know about it because Google will likely to retaliate by imposing an information blackout on News Corp.

    Small loan losses can wipe out banks

    Thursday, April 30th, 2009

    This week, Australian banks are confessing to profit downgrades. One of the chief reasons for reduced profit is the rise of bad debts. Also, banks are setting aside greater provisions for bad debts. That is, as we wrote before in Is a bank safe if it makes good profits?,

    … banks will guess how much of its loans will default or be delinquent and apportion a small fraction of them as an expense. But until debt defaults really happen, a guess is just a guess.

    Now, as you read the mainstream media, you may see positive spin being painted for the bad debt provisions by comparing their ‘miniscule’ size with the size of the entire loan portfolio. For example: “$1 billion of provisions for bad debt is only 1% of the entire loan portfolio.”

    Well, small size (of bad debt provisions) can be very deceiving! Why?

    Remember the concept of capital ratio that we introduced in Introduction to banking corporate accounting? Let’s say a bank is leveraged 25 times, it means they have a capital ratio of 4%. In this case, if 1% of their loans go bad, 25% of their equity are wiped out. If 4% of their loans go bad, the bank is completely wiped out and is insolvent.

    Australian banks are more leveraged than their overseas peers, according to Brain Johnson, the former bank analyst of JP Morgan (see How safe are Australian banks?). So, a small proportion of loans going bad can have a more than proportionate impact on the bank’s balance sheet due to leverage.

    Is a bank safe if it makes good profits?

    Sunday, April 19th, 2009

    The masses dislike the banks immensely. In Australia, we read news report that the banks’ profits were higher today compared to last year. The masses surmised that since their profits have increased, they must be doing well. In addition, some of those who are very optimistic about Australia’s banking sector will cite the increased profits as the basis to support their optimism.

    So, just because a bank is making good (and rising) profits, does it mean it is safe? The short answer is “No!”

    Remember what we said in Banking for dummies, we said that

    At its very core, a bank borrows money at lower interest rates and lends them out at higher interest rates. Its borrowings are its liabilities while its lendings are its assets. When you deposit your money into the bank, your money is the bank?s liability but your asset. In accounting technicalities, your money goes into the bank?s balance sheet as an asset with a corresponding liability.

    As we said earlier, a bank profits by taking a cut between its borrowing and lending interest rates. If it keeps too much deposit money in the ?vault,? it is money that is not put in productive use and thus, have a negative impact on its profits. On the other hand, lending money out entails risks of debt default.

    Basically, all a bank has to do to increase its profits is to lend more money! This increase in profits is highly visible in the profit and loss statements. But what is much less visible is the increase in debt default risks of its loans. Typically, banks will guess how much of its loans will default or be delinquent and apportion a small fraction of them as an expense. But until debt defaults really happen, a guess is just a guess. If their guesses are wrong by a long shot, the result will be asset write-downs, which will result in unexpected losses.

    Assuming that Australia is going to face a serious bout of debt deflation soon, we can imagine many of the banks’ guesses will be revealed as laughable underestimates. Even if the banks realise today that their guesses are way off from reality, we can imagine that they will be loathed to confess because that will imply huge profit downgrades.

    The Australian government better warm up their monetary printing press to be ready for the activation of their bank deposit guarantees, just in case.

    Central banks helping to increase your insurance premium

    Wednesday, April 15th, 2009

    Insurance is one of the easiest businesses to understand. Basically, it earns money this way:

    1. Collect insurance premiums
    2. Invest the collected premiums (in insurance jargon, this invested money is known as floats)
    3. Pay out insurance claims

    Where are the areas that can go wrong with this kind of business?

    One possibility is that it may miscalculate the probability of mishaps and mispriced the insurance premiums charged to customers. As a result, claims on the insurance company overwhelms its ability to pay. The Australian government’s guarantee of bank deposits and funding is akin to providing insurance to the Australian financial system. But as we said before in Australian government?s contingent liability to exceed AU$1 trillion, if the mishaps in the financial system are correlated with each other, the Australian government may find that it has burned a big hole in its pocket. For insurance companies, at least they can buy re-insurance to insure itself from such fiascos. The Australian government, on the other hand, have no re-insurance to insure itself other than the monetary printing press.

    The other possibility of what can go wrong can occur when it suffer severe losses in its investment endeavours. That can happen when the investment divisions of insurance companies decide to become cowboys and get involved in sexy derivatives, as in the case of AIG. The more prudent ones keep a substantial portion of its investment portfolio in safe bonds and other fixed interest securities. That’s where central bankers are not helping. By cutting interest rates to below price inflation rate, the investment returns of insurance companies get eroded. Along with rising value of claims due to price inflation (e.g. rising health care costs for health insurance), their profit margins get squeezed, sometimes so severely that they can suffer losses.

    So, guess what insurance companies will do in that case? They raise the premiums that all of us pay. Cutting interest rates may be good for borrowers, but as everything else in life, there is no such thing as a free lunch.

    Banks’ strategic behaviours unleashing waves of job cuts

    Thursday, December 18th, 2008

    Since the credit crisis first erupted 15 months ago, the problem was mainly confined to the financial side of the economy. Today, we are seeing signs of the crisis spreading to the real economy in far-flung countries like Australia. As Australian banks expected to sack staff reported,

    Jobs are disappearing at the four major retail banks, and staff freezes have been ordered at investment banks and struggling fund management groups.

    There are news reports that 10,000 banking jobs could go in the months ahead. While we will not be investigating the credibility of this number in this article, we will explore the concept of Game Theory using banking jobs as an example.

    In essence, Game Theory is…

    … a branch of applied mathematics that is used in the social sciences (most notably economics), biology, engineering, political science, international relations, computer science (mainly for artificial intelligence), and philosophy. Game theory attempts to mathematically capture behavior in strategic situations, in which an individual’s success in making choices depends on the choices of others.

    In the banking jobs example, what if one of Australia’s major banks decide to cut staffs? What will be effect of this strategic decision on the other banks?

    To put it simply, if XYZ bank restructures its business and cut, say 15% of its workforce, it will have a competitive advantage against the other banks in terms of costs. During hard economic times, people are tightening their belts and consumer spending will be down. Naturally, consumers will care less about product differentiations and care more on finding the cheapest bargains. Therefore, businesses that can lower their costs will have a price competitive advantage against their rivals. So, in this case, what will the rivals of XYZ banks do? They will follow XYZ’s lead of restructuring and cutting staffs.

    That’s why in the months ahead, as the economy slows further, we will see waves of corporate restructures and staff cuts. Unfortunately, these actions by businesses will further depress the economy, which in turn will provoke the next wave of cost cuttings.

    Why are Australian banks not willing to lower mortgage rates?

    Sunday, August 17th, 2008

    Australian banks have been under pressure from many fronts to lower their mortgage rates in response to a possible interest rate cuts from the Reserve Bank of Australia (RBA). The government and opposition parties are demanding that the banks should do the ‘right’ thing by easing the strain of the working majority. The RBA added to the pressure by declaring that it sees no reason why mortgage rates should not lowered in response to monetary easing. The media poured fuel into the fire by accusing the banks of greed.

    So far, none of the banks are committed to do so- none pledged to lower their lending rates to match the RBA’s cut in the cash rate. As we said before in Too eager for an interest rate cut?,

    Fourth, an interest rate cut by the RBA need not necessary mean a cut in the mortgage rate. In fact, the opposite can occur.

    Understandably, with Australian households under unprecedented debt stress, this has fuelled popular sentiments against the banks. They have become the new bogeyman to target. But as one of our readers said very well in Would the RBA?s rate cut do any good?,

    It is not so much bank bashing (kind of pointless beyond the immediate feel good and but easy to slip into) but the realities do need to be looked at, and yes, I agree it may be far too late for the banks to do much else and are themselves to an extent pawns in the bigger global picture.

    Here, we try not to pass moral judgements on banks. After all, banks are just impersonal profit-making institutions. Therefore, it is inappropriate to apply moral motives on non-person entities. What can expect from entities in which their clearly stated objectives is to make profits?

    While it is true that the money market rates for the banks have fallen since the market’s expectation of an interest rate cuts has risen, does that automatically mean that this alone is a good reason to cut mortgage rates? Motives aside, what are the possible reasons why banks are not willing to lower mortgage rates? We can think of a few reasons here:

    1. Mortgages are long-term debt (typically up to 30 years). Cash raised from money markets are short-term credit (which ranges from 1 month to 1 year). How can we expect the banks to lower their long-term lending rates just because the cost of their short-term credit has fallen? Indeed, as the situation for the non-bank lenders like RAMS had shown, borrowing short-term money to fund long-term lending is a good way to become bankrupt, thanks to the credit crunch. This flows on to the next point…
    2. Because of the risk involved with funding long-term debt entirely with short-term credit, banks have to diversify their lending source. As this news article said,

      Our banks raise about half their cash from local deposits, a quarter from local bonds and the rest from the global market.

      While the RBA may have some influence on the domestic short-term money market rates, we can assure you that they have no influence on the global markets. Indeed, as we explained before in Can falling interest rates and rising mortgage rate come together?, there is insufficient savings domestically to fund all the loans. Therefore, the banks have to get the shortfall from overseas and submit themselves to the global credit conditions. The global credit conditions are far from settled and major eruptions can still occur any time. As we said before in The next financial time bomb- Credit Default Swaps, CDS is the next global time bomb to explode. Indeed as this news article reported,

      Most institutional investors expect another failure of a major financial services firm in the coming year and view credit default swaps as a serious threat to market stability, according to a survey by Greenwich Associates.

      Once the banks cut their mortgage rates, it will be very unpopular for them to raise them again in the event of further ructions in the global credit markets.

    3. What if the banks expect more bad debts in the future? Lending rates are proportional to the risk of default of the loans. The banks’ unwillingness to lower mortgage rates could be a sign that they are pricing in more risks on their loans.
    4. It is open knowledge that price inflation is still on the rise in Australia. In fact, the RBA expects price inflation to peak at around 5% before turning down again. For any given nominal rate, rising price inflation implies a lowering of real rate. As we explained before in Is property a good hedge against hyperinflation?, during times of hyperinflation,

      At the same time, you can expect bankers to raise borrowing rates very quickly to protect their profits.

      By not raising their lending rates when price inflation are trending upwards, banks are actually losing money in real terms.

    Finally, we would like to point out that we are by no means defending the banks. Neither should this be construed as ‘predictions’ that banks will never lower their mortgage rates.

    How dodgy is Adelaide Bank’s lending practice?

    Wednesday, August 13th, 2008

    Yesterday, in The dark side of rising bank profits, we reported on the profit surge of Bendigo-Adelaide Bank’s profit surge. One of our readers know something about Adelaide Bank better than us and has kindly let us publish his/her story:

    A friend of mine has been working for Adelaide Bank the past few years. In 2003 we had a conversation about loan standards and what he said shocked me. He worked in the business/commercial loan department of the bank approving loans over 1.5m in size. He said that they only checked the documents visually when an application came in. No other due diligence was made apart from the credit check.

    He said that people would send in obviously doctored tax statements, some even dodgied up on a home computer, but they would still be approved.

    Remember this was in 2003. Now we can start to understand how that guy from Perth, Mr ?Richie Sambora?, was able to make such large multi million dollar commercial loans. As long as the numbers looked right and matched up to what you wanted to purchase, Banks like AB would approve it.

    When Bendigo Bank bought Adelaide bank there were a few articles in the mainstream press lambasting the move based on the fact the AB loan pool is the most riskiest and low quality. When the tide goes out, and commercial loans start defaulting Bendigo Bank will regret their purchase.

    As an aside, I remember in 2005 the majority of Adelaide used car yards would recommend Adelaide Bank as the fastest and easiest way to get finance. It was basically on the same day you could get approved, with only a credit check and no other documentation needed.

    P.S. Please note that this is an unverified story. Read it with a grain of salt.