On the Uselessness of the RBA


Today’s Profit Watch can’t help but begin with a hat tip to our colleague Shae Russell.

Shae said earlier in the year that Aussie dollar gold was going to $2,000 an ounce. Bingo.

Gold is beginning to rumble in US dollars too. What is this signalling? Truth be told, I’m not too sure.

Bitcoin is still firing as well. The ASX continues to flirt near all-time highs. Everything is moving.

Is this the ‘melt-up’ that we predicted? Maybe. It could have a longer way to run, certainly…

Aussie stocks: Still reasonable, actually

A chap working for the Reserve Bank of Australia just did a study of Australian shares over 100 years.

He says the current market is trading very close to the historical price to earnings (P/E) ratio.

That puts the current 18% move up in the ASX 200 this year in an interesting perspective. The market could conceivably go much higher and stretch that P/E much wider.

You would have to think that’s more likely than not, considering where bond yields are going at the moment. Indeed, danger could spring from this.

Madeleine Beaumont is a portfolio manager. She’s also cited in today’s Financial Review as saying to be wary of the ‘bond proxies’ on the ASX.

These are companies that pay out a higher percentage of their earnings as dividends. They look attractive on this metric alone to investors looking for income.

But there’s a catch with these stocks. The money they’re paying out as dividends is obviously not being invested back into the business.

That means you’re less likely to achieve capital growth over time. These businesses also run the risk that they’ll get overrun by competition prepared to innovate and invest.

You might be surprised to know that one of the secrets of Japan’s meteoric rise from the ashes of the Second World War to richest country in the world was the country’s treatment of dividends.

Japan basically banned them. The powers that be wanted Japanese companies to continually invest to power industry growth.

The Japanese government also discouraged consumption from the general populace to help achieve this.

That kept imports down and meant precious foreign exchange was reserved to help fund strategic industries that needed foreign components or inputs. 

The magic of credit creation

Another feature of the Japanese rise was their use of bank financing.

The central bank would give the banks loan quotas and directives about which industries to supply credit to. It was devastatingly effective.

I bring it up because some academics have got together to study this ‘credit guidance’ around the world. You can think of it as the secret sauce for the high-growth economies of Asia over the last 50 years.

The paper is called ‘Credit where it’s due’. It’s a fairly breezy read for an academic tome. You can check it out here.

It also makes a mockery of the Reserve Bank here. I don’t mean the writers who created the paper. They don’t even mention Australia, as I recall.

But any reader can only come to the same conclusion as I did: The RBA’s interest rate policy is about as sophisticated as wearing a bear skin in today’s winter.

It is idiotic. All the RBA needs to do to get Australian growth higher is to tell the federal or state governments to stop issuing bonds and start taking out bank loans.

Why? Because bonds just recycle existing money from the private sector to the government. To fire economic growth requires new credit to enter the economy.

The fastest way for that to happen is to walk into your local branch and take out a bank loan. That’s because banks create credit from nothing.

It is blindingly obvious if you consider the last 18 months here in Australia. The housing market tanked as soon as bank lending slowed down.

Now that the controls are loosening, the market is becoming perkier again.

The more credit that enters the share or property markets, the higher they will inflate.

Wouldn’t it make more sense to use bank credit creation to fund new business, innovation and technology? Of course it would. Why don’t we do that here?

Who knows? One can only assume we have a political class too stupid to do anything different or answer to those who prefer the system as it is.

Read the paper. You’ll see that Australia’s monetary emperor indeed has no clothes.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch