What do you get when you have a set of scales and equal weight on both sides?
No movement. That’s kind of what the Aussie index looks right now.
What I mean is, pressure on the banking sector is pushing down.
But the other big stocks are rallying and pressing upwards. So we’re staying around good highs, but it’s hard to see a big breakout forming.
I saw this in the Australian Financial Review this morning1…
‘“The big cap stocks are driving the market,” said Jason Teh, chief investment officer at Vertium Asset Management.
‘“There’s been a huge price-to earnings multiple expansion of these stocks.”’
Woolworths and Wesfarmers, for example, now trade for over 20 times earnings even with modest outlooks for profit growth.
Money is flowing to the big stocks and away from, for example, unprofitable tech firms with more exciting growth ‘stories’.
This also explains why the index has held up, but small- and mid-cap stocks have come under pressure relative to the barnstorming first half of the year. That’s my read recently, anyway.
It’s the outlook for the banks that we really have to wrestle with if you’re relying on the index to do the heavy lifting in your portfolio…
Nobody can get a clear read on just how much money, and for how long, the remediation issues will cost and linger for.
For example, British banks also indulged in selling dubious products to unsuspecting clients. It’s known as the payment protection insurance scandal.
September 2019 saw the total bill for the UK banks around this pass £50 billion. Yep, that’s billion with a ‘b’2. Some of these claims date back to the 1990s!
(The UK banks also tried to ignore the issue until defeated in the High Court. I guess British banks treat their customers the same as ours do: as serfs merely useful for wealth extraction.)
We have no way of knowing if the Australian issues will hang around the same way as the UK ones…
Just how big a problem?
Regardless, that leads to uncertainty over any earnings projections. That’s more likely than not to keep them suppressed.
The only scenario that counters this is if buyers lunge for the dividend yields as they are and trust to the banks propping up their revenues and margins any way they can.
That would involve more employees getting the flick, more branch closes, and, if they’re really ‘lucky’, cheap funding from the Reserve Bank of Australia to lower their cost of funding.
This political selling point for such an outcome would be lowering interest rates across the economy to bolster consumer spending and household finances.
The point left unsaid is that these only need propping up because the debt overhead across the economy is so huge in the first place.
Why is that?
Most of it is mortgage debt. The only way for most families to acquire a home is to take on large leverage because the government allows land values to inflate so high in the first place.
The ‘unearned’ gains in property attract investors to chase these rising values using borrowed bank credit, which inflates property prices even higher.
It also fosters an environment prone to — *ahem* — dubious decision making at the local level.
Australia’s sorry system exposed
The Age ran a story over the weekend discussing land deals in Melbourne’s south east.
It relates to a hearing looking into property and planning corruption involving property developers and the local council3.
From The Age…
‘IBAC Commissioner Robert Redlich, QC, said the hearings would consider whether “public officers” had been “improperly influenced through donations, gifts, pro-bono services or other hospitality”…
‘So questionable were some resolutions that the council received confidential legal advice warning of “capricious” and “unlawful” decision-making that risked losing public and state government confidence “with respect to planning matters in particular”.’
We’re talking big money here.
A potential rezoning of 133 hectares of farmland from commercial to residential would have delivered a windfall $50 million to the owners.
This is Australia’s idiocy on display.
The local council could easily rezone the land and keep the uplift for the local community. It could then sell the land at the rezoned value to the developers or produce low cost housing themselves.
Instead we get shady deals and inflated property prices for buyers, bigger debts and the whole sorry system as it is.
This, in turn, deflates the real economy as mortgagors have less to spend on goods and services in the economy.
Such is the absurd structure of our financial system, too, that the government and taxpayers subsidise and protect the banks even after the royal commission revealed their blatant and outrageous self-interest.
The problem for Australia, like all Western countries, is that retirement accounts and household wealth are so intertwined with financial markets now that any pretence to a genuine free market is absurd.
That means banks will shortly go back to financing as many loans as they can to grow their earnings.
This being Australia, most of it will flow into the property market and inflate prices even higher than they are now.
Economic forecaster Fred Harrison sums it all up as a modern culture of cheating.
People know perfectly well that the path to wealth is not working for wages to produce goods and services that benefit the community.
The quickest path to a buck is to use leverage to speculate in financial assets that, in the case of real estate, comes at a very real human cost.
One man’s capital gain on a house clearly shuts a marginal buyer out of the market. But inflating property values is sold to us as some mythical way of creating ‘wealth’.
That the system is so blatantly rigged in favour of asset holders is part of the riots and unrest rollicking the world.
But, hey, as long as the banks keep paying dividends, right?