An Ode to Bankers

Hands holding a piggy bank and a house model

This week, we officially relaunched The Daily Reckoning Australia as Markets & Money. Aside from the name change, pretty much everything else will stay the same. You’ll still get to hear from Vern Gowdie, Jason Stevenson, Callum Newman, Bill Bonner and the rest of the gang here at our Albert Park headquarters. If you haven’t done so already, the only thing you’ll have to do is ‘whitelist’ the new email address by adding it to your address book, or by replying to the first email you receive.

And now, on with the show…

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Although we’ve had a facelift here at Markets & Money Weekly, some things in life never change.

Take the Reserve Bank of Australia for example.

This week, RBA Governor Philip Lowe raised eyebrows after criticising lenders for financing loans to borrowers with inadequate income buffers. The implication here was that, as borrowers stretch themselves thin, households are increasingly coming under heavier financial strain.

Valid as the criticism may be, we suspect there are a number of investors and homeowners that might object to it.

To be sure, we don’t disagree that lending standards have prompted unstable levels of household debt. Or that many households find themselves in precarious positions.

But, keep in mind that this practice has also led to exceptional property price growth, making an untold number of Australians wealthier in the process. In fact, while household debts have risen 32% since 2012, assets have climbed even faster, at 51%.

That has to be count for something, doesn’t it?

In any case, we’re not here to pick sides. Though, considering seven in 10 households own their homes, we suspect many hold some degree of gratitude towards ‘debt’.

So, rather than directing another tired invective at the Reserve Bank, today’s Markets & Money is playing the devil’s advocate.

Proposing a national day for bankers

Of course, before we shower the RBA with faint praise, it would be remiss of us not to mention that the central bank is as responsible for existing home loan lending standards as the commercial banks that set them.

Without the RBA’s hand in setting interest rates, there would be less room for banks to drop home loan rates. In turn, that would lead to less demand for loans, which would weaken price growth.

In Australia’s case, the opposite has been true. And it’s served as a potent formula for nigh on three decades. We’ve become a far wealthier nation on the back of easy credit.

And some praise, however undeserved, has to go to the RBA for keeping the credit tap flowing.

Of course, we’re fully aware that Australia is the second most indebted nation in the world. And we know that our golden period of growth was built on debt and a once-in-a-lifetime commodities boom.

But maybe it’s time to cut bankers some slack.

After all, are we angry that they played a major part in making Australia one of the wealthiest nations on Earth? Or that our wealth is derived largely from debt, and not productivity gains?

Granted, we know the answer to this rhetorical question fully well.

Quite frankly, though, how many people give thought to how they acquire wealth? We’d just as happily accept a division one Powerball win as any other means of wealth-accumulation. And we suspect you’re no different.

What, then, is the real reason for the disdain we have towards the RBA, and bankers in general?

In truth, our anger doesn’t stem from how we’ve amassed our wealth.

If the ‘how’ was what we were so hung up about, we’d have no one to blame but ourselves. We’re all as complicit in the creation of debt as the banks. It still takes two to tango in the lending/borrowing dance.

Broadly speaking, most borrowers know what they’re getting themselves into when they take on a home loan. Whether they acknowledge it or not, they’re mindful of the fact that their ability to make good on their loan could change at any time. A job loss, or unexpected expense, can put a spanner in the works of the best laid plans.

But human beings are hardwired to extrapolate the future from what’s happening in the present. Telling someone to renege on satisfying their desire of owning a home is tantamount to telling a smoker to quit puffing. It won’t work.

As for the small kinks of potential unemployment, higher interest rates or rising expenses in the future, well, most of us figure we’ll cross that bridge when we come to it. In the average person’s mind, the present is no place for introspection.

In any case, faced with the prospect of owning a home, many people overlook the ‘what ifs’ for selfish, but perfectly understandable, reasons.

We don’t blame people for purchasing homes they’ll struggle to afford, because it’s an intrinsic part of human nature to want these things. But some level of responsibility has to fall on the borrower. It is disingenuous to only blame banks for accommodating people’s hopes and dreams.

Ultimately, it’s not so much the low interest rates that people are angry about when they criticise the RBA and the big banks. Rather, the anger is borne from the growing realisation that they might lose the wealth they’ve obtained.

When you’re threatened with the loss of that which you’ve gained, the normal reaction is one of panic and anger. You look to point fingers at anything and everything that could shift the blame and responsibility off your shoulders.

Bankers, with their insatiable greed, make for easy targets. But their actions are merely a magnified version of our own greed. We say little as we become wealthier on the back of easy credit, but are quick to rebuke bankers the minute things start to wobble.

In reality, our problem with debt goes beyond mere economics. In fact, it touches at the very heart of social philosophy.

We live in a complex system that accounts for the desires of 23 million people. A system increasingly influenced by the whims of a further seven billion people worldwide.

To say that interest rates should have never fallen so low or that lenders should have more stringent standards is crude and one-dimensional.

Borrowers and lenders are human beings, driven by emotions — as well as personal and collective goals. Both parties want to make money, so they accommodate one another. It’s a marriage of convenience, and one which provides both borrowers and lenders with tangible rewards.

If we accept this line of thinking, it becomes clear that debt bubbles are an inescapable fact of life. Desire and ambition must lead to excess. Otherwise it’s neither desire nor ambition.

And though we are told to heed the warnings of past booms and busts, we can’t ever truly learn from prior mistakes. The very idea goes against human nature. Desire, ambition, goals, status — these are the emotional tugs that override what we often delude ourselves into believing constitutes common sense.

Yet, as the observable universe shows us, lurching from one extreme to another is part of life. We may be headed for an unpleasant extreme in the near future. But we’ll come through that, as we have before.

What we can’t do is control the ebbs and flows of human nature — and the booms and busts that arise from this.

What we can do, however, is predict the direction of these cycles with a degree of accuracy.

In fact, it’s perfectly possible for you to position yourself to come out ahead, irrespective of which extreme we’re hurtling towards.

How? You’ll find the answer here.

This week in Markets & Money

On Monday, Jason explored the love-hate relationship investors have with gold.

Gold bulls often like to point out that there’s always more demand for bullion than supply. But is that really true?

We often hear about the high demand for gold in India and China. Less often mentioned are the gold discoveries weighing on the supply side of the equation.

This week, China’s second largest gold producer announced it had made the largest gold discovery in history. China is currently the fifth largest gold producer, but this discovery could push it into first place. That doesn’t bode well for the demand-supply outlook. Or the gold price for that matter.

And it doesn’t make gold or major gold producers a particularly attractive investment. So where should you be looking instead? Click here to find out.

On Tuesday, Jason turned his attention to the stock market, revealing the one sector he’s avoiding at all costs: crude oil.

According to Jason, too many investors focus on OPEC’s influence on oil. But the elephant in the room is the US shale game, not OPEC. As long as oil prices stay above US$45 per barrel, the level at which shale remains competitive, you can expect to see more oil production hitting the market this year.

Because of this, Jason says a supply shock is due to hit the crude oil market in the months ahead. For the full run-down on this story, click here.

On Wednesday, Vern ‘recounted’ the moment the RBA raised interest rates to 4% at its latest meeting. His tongue-in-cheek missive, what he terms his own version of ‘fake news’, is not to be missed. Click here to read it now.

On Thursday, Callum presented readers with an interesting premise: If you want to gauge future stock market conditions, look at marriage rates, and the price of sand. As Callum showed, the employment rate of married men has predictive value for the growth of economies.

It’s a peculiar way to view the world. Then again, you’ll never make money by following what everyone else is doing. For more on this story, click here.

On Friday, Vern took a decidedly different stance on debt to today’s Markets & Money Weekly. He concluded that, if we accept that our current situation is unsustainable, the financial stress from it poses a threat to Aussie jobs and incomes. That, he says, will be the knitting needle our property bubble has been in search of. And it could lay the ground for what Vern calls the ‘Greater Depression’.

For a more sombre take on Australia’s debt problem, click here.

Until next week,

Mat Spasic,
For Markets & Money

Markets and Money

Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets.

Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. 

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