How big, bad, and burly is Australia’s banking system? It’s so big, bad, and burly that the market capitalisation of the Commonwealth Bank of Australia (ASX: CBA) is not only close to $100 billion, it’s bigger than the total market cap of the banking sector in countries like Germany, Italy, or Singapore. That’s right, one single Australian bank is worth more than all the banks in Germany, at least according to the share market.
It’s an amazing achievement, considering Germany has a GDP of around $3.5 trillion dollars. Australia’s GDP is around $1.4 trillion. The CBA is obviously punching above its weight. But is there another explanation?
Well, it could be that the market valuation of CBA confirms that Australia has the best banks in the world. They flew through the GFC with minor turbulence, hardly touching the government guarantee on their borrowings. This, then, is a testament to the superior management of Australian bankers and outstanding regulation, right?
That’s one way of looking at. Another way of looking at is that Australia has an oversized banking sector for its economy and the banks remain over-leveraged and heavily invested in residential and commercial real estate. He doesn’t put it exactly that way, but we reckon this is one of the points Greg Canavan makes in his new brief on the Australian economy.
When you say something like ‘the fuse is lit,’ you’re implying that something is going to blow up. It could be the national balance sheet (thanks to the trade deficit) or the banks themselves. Either way, it certainly smells like sulphur. But to be fair, the only thing blowing up so far this year is CBA’s share price.
The share price of Australia’s biggest battling bank is up almost 25% this year. That’s a tidy little capital gain in a blue chip stock, before profits. But something tells us that just as BHP Billiton became a proxy for the commodity story, CBA has become a proxy for the ‘yield’ story.
The ‘yield’ story is the story of desperate savers and investors. With interest rates under attack by central bankers, investors and savers have had to search high and low for anything that delivers fixed income without a whole lot of risk. We will ignore how wrong it is for central bankers to favour finance and housing investors over savers and focus on the investment aspect of the hunt for ‘yield’.
The hunt for ‘yield’ is probably a narrative lie. That is, the idea that you can easily and painlessly switch from one class of investments (growth) to another (income) is probably wrong. It’s never that easy. And with equities, you always have risk, even if you’re investing in mature companies.
But there’s no doubt that investors, in psychological terms, are more worried about the return OF their capital than the return ON it. Hedge funds have noticed. Fixed income hedge funds are set to have more assets under management than equity hedge funds for the first time ever, according to the Financial Times. Both groups had just over $500 billion in assets under management at the end of the third quarter. But the trend is clearly with fixed income.
CBA’s rising share price is a version of this trend within the share market. The bank pays a dividend yield of 5.48%. That’s downright opulent by current standards. NAB yields 7.31%, ANX 5.81%, and Westpac 6.40%. With a limited number of commonwealth bonds and State bonds on offer, the Big Four banks may all have become yield proxies.
If the banks have become the flavour of the month with foreign capital, it could also explain the persistently high Australian dollar. The falling terms of trade and slower GDP growth would normally be accompanied by a weaker dollars, as Greg notes. But the attractiveness of relatively high yields on bank stocks could delay this adjustment.
Out in the wider and more chaotic world, things fall apart as they always do. Egyptian President Mohamed Morsi has rescinded the decree making all Presidential decrees exempt from judicial review. This is supposed to ‘walk back’ from the constitutional cliff the crisis that pits Egypt’s Muslim Brotherhood versus the seculars, liberals, and Christians trying to collaborate on a new political living arrangement.
We hate to be the one to point this out, but rescinding the decree unilaterally is, in principle, every bit as objectionable as issuing it in the first place. It confirms the basic idea of government by executive order.
It reminds us a little of how the principle of judicial review was established in American law. In the Marbury vs. Madison decision, US Supreme Court Chief Justice John Jay ruled that a Congressional act empowering the Supreme Court to review certain aspects of the Executive branch was itself unconstitutional. Do you see what he did there?
In denying the Court a specific power given it by the legislature, he gave it a far bigger general power: the ability to decide if any law is constitutional. Pretty clever, isn’t it? Yet modern day advocates of democracy scream and howl any time the courts get in the way of ‘the People’. Are they right?
To quote Mostafa Hussein, ‘Being democratically elected doesn’t mean everything you do thereafter is by definition democratic.’ The law is still the law, even when you win an election. But the fig leaf of elections have covered the worst parts of many tyrants, at least for a while.
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From the Archives…
Will Lower Interest Rates Impact Australia in 2013?
7-12-2012 – Greg Canavan
Is the Australian Economy in Recession?
6-12-2012 – Greg Canavan
US Debt: Why America May Need a Bail Out by the IMF
5-12-2012 – Bill Bonner
If Profits are Falling Why are Stocks Rising?
4-12-2012 – Dan Denning
The Frontier Way
3-12-2012 – Dan Denning