One of the historic criticisms of gold is that it doesn’t pay income. It’s just a bit of inert metal.
Here’s the problem in today’s world: bank accounts are going the same way.
The yield on these are more a fizzle than the AFL Grand Final on Saturday.
The Australian Financial Review reports that 30% of call deposits in Australia already only offer an interest rate 0–0.25%.
This a problem if you’re invested in the Big Four banks. If you’re Australian, that’s you.
Here’s why. Every time the RBA lowers the cash rate, it pressures lending rates down.
When rates are higher, banks can offset this via cutting what they pay for deposits. This can protect their margins.
But they can’t cut lower than zero — at least not yet, anyway.
This may seem slightly obscure.
But every move down in rates damages the outlook for bank shares and especially their dividends.
Do I have your attention now?
It doesn’t end there, either. This, in turn, is problematic for the Aussie market as a whole.
That’s because bank stocks make up so much value of the general index.
Then we have the wildcard we’ve covered before in these pages.
That’s the Reserve Bank of New Zealand planning to hike local capital ratios to the highest level in the world.
It’s a proposal now. We’ll know for certain by November under the current guidance.
The prevailing dynamic could see Westpac cut their dividend and ANZ halt their share buybacks, at least.
It’s not as if the outlook for the banks is benign, either.
They’re losing market share to non-bank finance firms in the aftermath of the royal commission.
They are divesting their wealth management and insurance arms. Fintech firms are coming to henpeck their credit card and foreign exchange divisions.
My colleague Ryan Dinse calls this the ‘Craigslist’ effect.
Banks are being sliced with a thousand cuts. The winners are the small firms that can gouge out a piece of their profit margins.
The implications for the Aussie economy are even bigger again.
But I’m not sure how many people will see it.
Look at this quote from a recent piece from ABC News and tell me why it’s wrong…
‘Finance may seem complex, but it’s not. Banks operate like any other middleman.
‘Instead of apples or hardware, they deal in money. They buy at a low price (interest rate) and lend at a higher price. The difference is their profit margin.’
The writer is clearly implying that banks borrow deposits to lend them out.
This is known as the ‘intermediary’ theory of banking — and was accepted wisdom for decades.
It’s also false.
Banks drive the economy up — and down
The reality is that banks create new credit when they make loans. They do not lend existing deposits.
This has a macroeconomic effect. The economy will expand as credit growth does because new money is flowing wherever banks direct their lending.
Implication? A weakening Aussie banking sector indicates a weaker economy unless lending really ramps up to offset this pressure.
All this seems to be setting the ASX for a dud October if history holds. It’s already one of the worst months for returns.
Let’s not forget we have the ongoing uncertainty around Brexit and the trade war currently in the mix, too.
It all makes for a stiff drink right now.
Are there any bright spots in the market? Yes — it would be churlish to deny the mining sector it’s due.
The Office of the Chief Economist says natural resource exports could hit $282 billion this financial year — a record. That’s thanks to iron ore, gold and LNG primarily.
One is wise to cast a sceptical eye over such forecasts. The world has a habit of making a mockery of them.
2020 is potentially shaping up as a tricky year.
Why the concern?
The ‘skyscraper’ curse in disguise
One reason might be the massive new airport that just opened in China.
Have you seen reports of this thing?
It’s been dubbed the ‘starfish’ and cost US$11 billion to build. It’s 700,000 square metres — or 98 football fields1.
It’s the world’s largest single terminal building. There are seven runways.
Last week saw the opening to help mark the anniversary of China’s Communist People’s Republic.
Of course, an airport has no direct effect on the economy.
But here’s a quirk of history: the world’s tallest, largest, grandiose projects have a habit of opening around market peaks.
We’ve said the same thing all year. Be bullish 2019. Be a little worried about 2020.