It’s all about debt these days. “We’re maxed out as a society. We’ve got too much debt. So every quarter per cent increase hurts so much more than it used to and that’s the risk,” said Aussie Home Loans chief John Symonds this weekend. You can see Symonds trying to get out in front of the coming discussion on ‘predatory lending’.
It’s funny how markets make opinions. A few years ago non-bank lenders and low interest rates were lauded as “the democratisation of credit”. On the back side of the credit bust, the politicians will trot them in front of the cameras and denounce them as crooks and fraudsters. It’s a good public spectacle.
In the meantime, don’t expect banks to issue fewer margin calls because of what the Fed did. If banks aren’t lending money for individuals and institutions to buy shares, shares will probably go down. “Borrowing to buy shares has more than doubled to AU$36.2 billion in the past two years, accounting for AU$88.8 billion worth of Australian stocks and helping to exacerbate the sharp falls on a highly geared market,” reports Lisa Macnamara in The Australian.
We know one or two investors who got margin calls last week as the ASX fell. They were forced to either sell stocks or contribute cash. It’s easier on the nerves to sell.
What about commodity prices in all of this? If banks crack down on hedge fund borrowing, or issue margin calls, it will be worth watching the commodity futures markets. Going long on commodities in the futures market has been its own kind of carry trade. But it raises an important question: how much of the strength in commodities prices is related to financial demand from leveraged borrowers who are now deleveraging (paying back loans)?
The gold price and the oil price have fluctuated. But so far, we haven’t seen a big crack in base metals prices or precious metals. You’d expect the opposite. You’d expect a rising gold price during massive financial uncertainty. It hasn’t happened yet. If the Fed keeps panicking, gold will do more than hold steady.
Markets and Money