Banking Cartel Says Jump. Will RBA say How High?

The banking cartel is on the move…

Last week, Westpac [ASX:WBC] raised interest rates on some of its variable mortgage products by 20 basis points. The Commonwealth Bank [ASX:CBA] just joined it, announcing a 15 basis point increase to its variable rate yesterday afternoon.

Surely it’s only a matter of time before the other two cartel members join in.

What’s funny about the whole thing is the amount of angst it’s causing for borrowers. We’re talking about a marginal increase in interest rates, from the lowest level in Australia’s history. It’s hardly anything to panic about.

Perversely, there are now increasing calls for the RBA to cut rates!

Let’s try and understand the logic here…

The RBA cuts rates aggressively to offset the mining investment and terms of trade bust. As a result they set off a two-city land boom of epic proportions. This causes banks to lower lending standards and channel their capital into land and house prices instead of genuine productive investment. The banking regulator, APRA, wakes up after years of slumber and says banks should lend more responsibly and hold more capital to strengthen their balance sheets. Banks raise rates marginally to protect profits and strengthen their balance sheets…

And then what happens? The cartel’s working ants, bank economists and the like, call for more interest rates cuts!

The stupidity (or complicity) is on such a grand scale it’s breathtaking.

A marginal interest rate rise on residential mortgages is exactly what Australia needs. The Sydney/Melbourne housing boom needs to stop before it blows itself up and creates untold damage to the economy. It might already be too late, time will tell. But to say a tiny increase in mortgage rates justifies an official interest rate cut to keep the party going is the same thing as saying that Australian savers (and Aussies in general via a lower exchange rate) should subsidise bank profits and carry the risk of a housing led economic bust.

Housing speculation doesn’t create wealth for the country on an aggregate level. It simply shifts wealth from one generation or social group to another. This obsession with housing is killing this country, but we can’t see it.

Who knows what the RBA will come up with on Melbourne Cup day? Perhaps they will bend to the will of the banking cartel. But if they have an ounce of independence or integrity they will keep rates on hold.

As I’ve said for some time, low interest rates are not the solution…they are part of the problem.

Not if you’re a central banker though. Overnight, European Central Bank Chief Mario Draghi threatened to do more on the interest rate front. This included cutting the deposit rate even further below zero than it already is.

This is just more highly paid and revered stupidity. I hope I’m around in 50 years to see what history makes of this moronic and slavish infatuation with central bank monetary theory.

After all that, I’ve worked myself up into a bad mood. I’m going to head out for a morning coffee to calm down. If you’re a little hot under the collar too, read on below for a calming influence. The very sensible and reasoned Jim Rickards answers some reader questions about precious metals, US energy technology, and the looming corporate debt problem.

Cheers,

Greg

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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