Don’t Worry, Everything’s Normal for the Banker

Oh to be a banker in this modern world, dear reader. They really get the sweetest deal imaginable, whether they’re in Europe or Australia. But it’s just history repeating. The taxpayers always get screwed in the end. More on that shortly.

For the moment, let us turn our attention to the markets. US stocks brushed off any worries about tonight’s Federal Reserve meeting, with the Dow rallying over 17,000 points again. But it was the Nasdaq that led the way, up 1.7% overnight. Facebook dominated the headlines, reporting growing users and earnings, but higher costs.

The stock hit all-time highs yesterday, but came off the boil in afterhours trading. But hey, when the stock’s been on a tear for six months, a breather’s bound to come, right? It’s gone from about $50 bucks to as high as $80.

But let’s look at Australia first. It’s what’s happening on the downside here I find notable. If you happened to catch the 52-week lows yesterday, there were an awful lot of natural resource stocks, especially explorers in the gold space (not to mention a couple of producers). The market is pricing in a grim outlook. As a general rule, explorers are the first line to fall in a bear market, as their cash dries up and investors have little reason to give them any more.

It’s hard to get bullish about commodities in the short term with BHP [ASX:BHP] and Rio Tinto [ASX:RIO] continuing to reign in their capital spending, too. According to the Australian Financial Review,BHP cut this by 32% last financial year, and they’re looking to cap it at $US14 billion. In other words, the rationalisation in natural resources that’s been happening over the last couple of years is still going on. If you’re looking for trades, the exciting stuff lies elsewhere.

Speaking of which, biopharmaceutical company CSL Limited [ASX:CSL] is out of the blocks with a rush this morning, up 1.41% as I write. On Monday, the company announced the acquisition of Novartis’ global influenza vaccine business for US$275 million.

Fund manager Roger Montgomery points out that Novartis was valuing this division on its books at close to $US1.4 billion. In other words, CSL may have picked up a screaming bargain if they can make the acquisition work. There’s a lot of momentum behind the healthcare sector at the moment. Stocks Regis Health [ASX: REG], Sonic Health [ASX: SHL] and Sirtex Medical [ASX: SRX] all hit 52 week highs yesterday.

Of course, the best business to be in is banking. It’s very profitable — and, apparently, above the law. Take the recent financial planning scandal inside Commonwealth Bank. Here’s BusinessDay journalist Michael West on the topic:

Rather than being prosecuted, the careers of those responsible have advanced. And those above them have continued to rake in bonuses. This despite a Senate inquiry that found fraud. The enforcement action has been feeble. It has been conveniently institutional rather than targeting actual people.

Once again, the regulator, ASIC, has been utterly useless. The Federal government declined to go ahead with a Royal Commission. If you don’t want anyone to know the answers, don’t ask the questions, hey?

It’s an international trend. Take the recent expose of a New York Fed employee who taped conversations inside Goldman Sachs that revealed the following, as The Independent reported:

The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them.

That brings us to the recent kerfuffle about European banks failing their stress tests. If you’re worried about it, don’t be. Everything the central banks and governments have done since 2008 has been to prop up the banks and restore them to profitability.

Our colleague Tim Dohrmann put it well in yesterday’s Money Morning:

If a poor but important bank looked to be in trouble — as defined by its Tier One capital ratio falling below a safe level — organisations like the ECB and EBA would still come to the rescue.

The authorities have made that clear time and again.

So if you think bank bailouts were a one-off feature, you’d be wrong.

The backstop of central bank intervention is now a permanent feature of the financial markets.

In other words, the gain is privatised and the losses are socialised. But it’s been like that for over 200 years. Phil Anderson’s book, The Secret Life of Real Estate and Banking,can show you that. That is to say, it’s all just business as usual, really.

Callum Newman+
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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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