The Aussie market really copped one across the chops yesterday. We were down 2%.
I’m not surprised.
I don’t say that to suggest I knew a big sell-off was going to happen yesterday.
All I know is that we’re currently in an odd market.
What makes me say that?
Well, the Aussie market is around all-time highs and yet all the strength appears to be in the top 50.
Momentum and strength lower down the market seems notably absent.
Certainly, there’s no sense of euphoria or aggressive trading you might see in a rip roaring bull market.
I’ve said to my mate Jonathan Evans for a while that I can’t see the Aussie market really breaking out while the banks remain under pressure.
They make up 20% of the index.
Just on that…
Tomorrow is the big day.
5 December is the date the Reserve Bank of New Zealand is due to release guidance on its latest capital proposals.
This is how much money the banks are required to hold against future downturns and bad loans.
Every bank chief will be down on their knees tonight hoping they don’t ramp up the level.
That’s because such a move would mean finding even more money.
This is a time when they have little to spare, at least when it comes to propping up their return on equity (ROE).
It’s all about ROE for the banks.
That’s what career banker Joseph Healy says. I just finished his book called Breaking the Banks.
Their focus on ROE is part of where their aggressive sales culture comes from.
It’s also why they’re so obsessed with flogging mortgage loans.
Banks are required to hold less capital against property loans than small business loans.
That means they get a better return funding real estate lending instead of business deals.
The latest yawn fest appears
This is a lousy outcome for the economy, however.
Wage growth and jobs come from small and medium sized business.
Inflating the housing market just deflates the real economy over time as more discretionary money is diverted to debt service and housing costs.
But you won’t hear that from the Reserve Bank of Australia.
They just released the latest yawn fest on their monetary ‘policy’.
What did Señor Lowe say?
‘The easing of monetary policy…has also boosted asset prices, which in time should lead to increased spending, including on residential construction.’
Here’s the paucity of their program revealed.
They’re relying on house price rises to rejig the fabled ‘wealth effect’ and kick start construction again.
The have it all backwards.
What they should do is raise interest rates.
That would make it more profitable for banks to lend.
Higher rates would encourage them to get on with it.
What Australia needs to get the economy revving is to kick start credit growth.
The October 2019 credit figures show annual credit growth at its slowest point in over nine years.
But we don’t want that pouring into the housing market.
The RBA could easily give the banks loan quotas or directives to provide Aussie business with funding.
Oh, and if Mr Comyn from CBA or another bank chief doesn’t like it?
Threaten to cut any miscreant bank off from the RBA’s repo operations or Committed Liquidity Facility and let them survive at the mercy of the market.
They would become very cooperative in an instant.
But, hey, there’s zero chance of this happening, so the Aussie economy will keep grinding along, with us digging holes and swapping houses with each other mostly.
And thank the Lord for Australia’s natural resource sector!
This sector is really firing
We just clocked our second consecutive current account surplus in 46 years.
This is thanks to high exports of iron ore and LNG. It’s another reason my bias is to look for opportunities in the resource sector at the moment.
There are currently big cash flows flowing through this sector.
Rio Tinto, for example, just signed off on a $1 billion investment in its ‘Tom Price’ operation in the Pilbara.
That’s another signal that mining investment is beginning to turn up.
The federal Resources and Energy Quarterly says the worst of the mining investment downturn is behind us.
See for yourself…
Source: Resources and Energy Quarterly
More money flowing into investment and exploration sets the stage for future catalysts in the share market.
For example, you can only ride a gold stock hitting a big deposit if a management team approves spending money on drilling in the first place.
You could also keep an eye on a stock called Imdex Ltd [ASX:IMD].
It’s a mining services stock that services the gold industry all over the world.