We’re on the road today. Our sister is checking out a university on the Gold Coast. She’s a learner driver, so our handwriting might be a bit wobbly today.
If we don’t make it back alive, it’s been great writing for you…
The five year anniversary of the failure of Lehman Brothers has been all over the media. Dan Denning sent around an article about the continuing fallout for investors here in Australia. It’s a miserable story. And it just keeps going.
But we’re far more worried about the next five years. You see, as bad as the crisis was after Lehman went belly up, the world’s central banks have been busy papering over the problem ever since. Over the next few years they will supposedly be unpapering, or ‘tapering’, as they call it. Who knows what they’ll find that was covered up back in 2009? What misallocations of capital and malinvestments are lurking?
What we do know is that every time the Federal Reserve has tried reducing its stimulus efforts, markets tanked. After spiking the punchbowl to keep the party going in the mid 2000s, the prospect of taking away the punchbowl this month is a party stopper. And for those of us who are addicted to rising stock prices, going cold turkey is, believe it or not, an unpleasant experience.
Perhaps we should conduct some action-based research on how best to come down off a high. We can see The Money for Life Letter issue now: ‘Cures for an Economic Hangover‘.
Perhaps this is why Larry Summers jumped ship just when he looked to be a sure bet to head the Federal Reserve. He knows it’s about to get rowdy when the Federal Reserve stops spiking the punch bowl. And he doesn’t want to be captain of a mutinous financial system. Imagine the phone calls poor old Bernanke got in 2008 from the banks. And the abusive phone calls after Lehman Brothers.
The Australian banks escaped in 2008, but now they’re in the limelight. For all the wrong reasons, for once.
But first, a disclaimer. This newsletter receives no advertising revenue from banks…or anyone else. So we don’t have to pander to any interests. Keep that in mind when reading the mainstream media.
Are we being paranoid? Nah. Michael West over at the Age writes about how a bank threatened to withdraw advertising from a media company last year. Which bank, or media organisation, is left unmentioned in the article…
Anyway, Wall Street hedge funds have placed bets that Aussie bank stocks will fall. ‘I was in London last week and one of the bigger questions I got was why the hell are the Australian banks performing so well?‘ said Bank of America Merrill Lynch chief global equities strategist Michael Hartnett in the Australian Financial Review.
He points out that the market cap of Aussie banks went from 2% of the global banking index to 14% over the last ten years. Warren Buffet likes to measure market cap to GDP as a ratio for timing the stock market. If it gets too high, there’s a correction coming. The same is in store for Aussie banks.
But they’re having none of it. Bendigo and Adelaide Bank chief executive Mike Hirst has been poking fun at all those hedge fund managers who have been short the Aussie banks over the past few years waiting for the bubble to pop:
‘"I think some of them have been burnt to tell you the truth," he said in an interview at the Bank of America conference in New York.
‘I came here four years ago and they’d walk through the door, sit down and say ‘can you tell me how I can short the Australian housing market.’
‘We’ve had none of that [this time].‘
The IMF is on the hedge funds’ side, oddly enough. It’s warning about housing bubbles and is trying to devise ways to stop them. It’s not focusing on the central banks – the price fixers in the banking industry. Instead, it’s targeting the banks and coming up with ways to restrict their lending.
Citigroup analysts have completely lost the plot altogether. They are warning that rising house prices could stop the Reserve Bank of Australia from lowering interest rates to combat any increase in unemployment. Rising house prices and unemployment at the same time? Isn’t the whole point of central banking to goose house prices to influence unemployment in the first place? Is this an admission of a new kind of stagflation?
Bell Potter’s analyst Charlie Aitken reckons foreign investors are ‘uneducated’ if they are shorting Australian banks. Don’t they know this is the lucky country? Don’t they know we haven’t had a recession in decades? Don’t they know house prices are rising? The simple answer is that, yes, they do know. And that explains the outrageous prices as they are. All the good stuff is priced in. The question is what happens when reality strikes.
Aitken also points out that ‘mum and dad’ investors own 50% of each bank. But that’s actually a risk, not a benefit. Mum and dad are growing old. And in retirement, people begin selling assets. More on that tomorrow.
Our morning media trawling efforts are throwing up a surprising discovery. Topics that used to be exclusively Markets and Money territory are become popular elsewhere.
Heck, even our fringe topic of fractional reserve banking made it into Alan Kohler’s editorial. Aussie investment manager Chris Leithner, who literally wrote the book on this topic, forwarded Kohler’s article on to us:
‘The whole thing relies on lenders (depositors) being prepared to leave their money with a bank at call, knowing it has been lent out again for 25-30 years. The reduction in gearing imposed by regulators since the crisis is mere tinkering. Ten to one, twelve to one, it’s all much the same: the system balances precariously on an inverted pyramid of shareholder capital and requires the confidence of at-call depositors to keep going.‘
Something that requires investors’ confidence to keep going is known as a ‘con’ for a reason.
Then there’s Michael West, who quoted none other than Thomas Jefferson and then predicted widespread homelessness:
‘‘If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks … will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.’
‘We have had the inflation. Then the GFC gave us the deflation. Then the banks doubled in size. Let’s hope the next step, homelessness, is a long way off.‘
Where does this leave us at the Markets and Money? Don’t worry, we’re still putting our neck out there and sticking our nose in where it isn’t wanted.
for The Daily Reckoning Australia
From the Archives…
Emerging Markets Walk The Tapertalk
6-09-2013 – Nick Hubble
House Prices Halve Without a Recession
5-09-2013 – Nick Hubble
A Manufacturing Industry Revolution
4-09-2013 – Nick Hubble
How the RBA is Using Low Interest Rates to Destroy Your Wealth
3-09-2013 – Nick Hubble
Is the Stock Market Predicting War?
2-09-2013 – Nick Hubble