Yesterday’s price action in the market was boring and uninformative. It doesn’t have anything useful to tell us about the things that really matter. For that reason we’re going to ignore it and first focus on what really matters to a business: earnings.
After dinner last night on George Street your editor happened to look up at one of the big signs on top of Sydney’s CBD skyscrapers. The bright red one said ‘NAB’. We wondered if NAB’s $1.2 billion second quarter profit would have been larger if it hadn’t spent money on such a vain and presupposing sign.
You can’t feel too bad for NAB. Banking $1.2 billion in a quarter isn’t bad at all. But the Aussie bank’s performance, and specifically its suggestion that the current preference for cash deposits is squeezing margins, highlights an interesting investment idea. Namely, that the traditional Australian banks are about to be surpassed by their wealth management arms.
Granted, many of the commercial wealth management firms in Australia really ARE extensions of the Aussie banks, just under a different label. But the facts are the facts. And at the current pace, it won’t be long before the assets under management in the superannuation system exceed the assets on the Australian banks’ balance sheets. This raises an even more interesting dilemma.
How in the world is all that money flowing into the retirement system going to be put to productive use? That question gets a lot more urgent when you realise that the Big Four banks make up such a large portion of the ASX/200 and the market capitalisation of the Aussie market. If bank profit margins are in secular decline, there are fewer earnings to distribute to the share-holding public.
Perhaps the numbers from Commonwealth Bank will be more promising today. Or maybe they’ll confirm that banking is no longer a high-growth, high-margin business. As Jim Rickards said yesterday during his presentation at the Museum of Sydney, he’s beginning to think the only way a bank can make money these days is to cheat, lie, and steal.
Actually Jim didn’t put it quite that way. We’ll have to go back over the transcript of his remarks in a few days to get the exact quote. But he was referring to JP Morgan’s London Whale trade, the manipulation of LIBOR by banks, and a long list of offences and transgressions which seemed to confirm the point. In a low-interest rate world, the only way to make more money is to take more risk…or cheat.
Maybe the folks at the Federal Reserve should keep that in mind when they push for negative interest rates. Destroying pensioners and savers by punishing holders of cash is a proven method for inflicting pain on the diligent. It is NOT a proven method for kick-starting GDP.
Just ask the Europeans. Second quarter GDP in the 17-member Eurozone contracted by 0.2%, according to figures released yesterday. Let’s pretend those figures are accurate. What does it mean? It means Europe is running out of excuses to delay addressing the issue at the core of the system: will it shore up its banking structure with a euro wide guarantee on bank deposits and then introduce a eurobond?
It’s plodding methodically down that road. And one of the big surprises (for your editor) at least, is that Jim Rickards is fairly bullish on the euro. He reckons the folks in Germany will get over their objections to a little inflation and recognize a whole Eurozone is in their interests more than a broken one. And it’s hard to argue that the euro has been weak, given its stubborn performance against the US dollar.
Of course everything in the currency world (except gold) is relative. The euro would probably be weaker against the dollar if the Fed wasn’t doing everything in its power to trash the greenback. But as Rickards pointed out yesterday, currency wars go in waves. One great power devalues and triggers global consequences. This leads to another great power’s devaluation.
About the only country in the world not deliberately trying to weaken its currency is Australia. Rickards reckons the market has spoken and chosen the Australian dollar as a safe haven currency. He says that capital flows determine currency strength more than interest rates, fiscal deficits, and trade balances. He warns not to be so sure that the Aussie can’t get stronger.
That will be unwelcome news for a lot of Aussie exporters. In fact, the political pressure is already building for the Reserve Bank of Australia to intervene to weaken the dollar. How high can the Australian dollar go before the calls to suspend RBA independence get louder and more bipartisan? Stay tuned…
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From the Archives…
When the Trickle Becomes a Flood
10-08-2012 – Greg Canavan
What Central Planners Can Never Know
09-08-2012 – Bill Bonner
The Central Bank Big Bazooka in Theory and Practice
08-08-2012 – Bill Bonner
In Thrall to the Iron Fist
07-08-2012 – Dan Denning
Cracks in the Foundation
06-08-2012 – Dan Denning