Today I’m throwing open the forum.
I want to hear your ideas (write to firstname.lastname@example.org) on what might be the most important question in Australian finance today.
Are you ready?
It’s the outlook for Australian bank stocks.
A colleague of mine pointed out the other day that he was beginning to like the idea of scooping up the Big Four banks on the cheap.
Not for today. Not even for tomorrow. But for the next 10 years. What’s not to like?
Quite a lot, from my point of view. But I could be wrong. So I’m more than happy to hear why.
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It’s not distressed and doubtful debts from COVID-19 that bother me. Those can be dealt with over time.
It’s the more central concern whether banks will retain their central role in the financial system for the next 10–20 years. I suspect not.
The advent of digital currencies changes the dynamic here in a big way.
And private banks are also hostage to an incredibly powerful force. It’s called the central bank.
These institutions have unlimited money and are almost totally unaccountable. They have the power to make banks redundant.
Look no further than Japan to see this. For 20 years the central bank in Japan has pinned interest rates at zero.
It has unlimited money to buy Japanese bonds to do this. And has done so.
Contrary to popular perception, low interest rates are not good for banks and they don’t stimulate borrowing.
If they did, Japan would have boomed for decades like it did from 1950–90. It hasn’t.
The net result is the Japanese banking system is a shadow of its former self.
The European Central Bank is now operating off a similar playbook.
It’s acquired trillions in bonds to keep euro rates low. And the European banks are slowly being crushed too.
Australia and the US are outliers now. Rates are still (barely) positive. But that could change soon.
From today’s The Australian…
‘The nation’s banks are scrambling to prepare for the prospect of negative interest rates washing over the economy, despite recent assurances by the Reserve Bank that such a move is “unlikely”.
‘But with many banks operating on ageing technology, senior bankers fear their systems won’t be able to cope with negative rates, drawing parallels with the “Y2K” bug ahead of the millennium, with an urgent need to find a technology workaround.’
It’s no exaggeration to say this could cause a mini panic in Australian bank shares.
I remember something similar happened in the US around 2016.
Bank shares tanked when the market got spooked about negative rates coming to the US.
It could happen here. How likely that is, I can’t say. It’s impossible to read people’s minds on this issue.
One respected banking analyst I know suggests the central banks are slowly suffocating the private banking system.
This is in order to facilitate the introduction of their digital currencies.
This would give central banks complete control of the financial system and your life. It’s also why banning cash is on the radar.
That might sound a bit too like a conspiracy theory for some.
Regardless, the central bank low interest rate regime makes no sense.
It must be addressed why they persist with it.
It’s accepted wisdom in finance that low interest rates ‘stimulate’ the economy.
People treat this idea like it’s gospel. Here’s the problem. There’s no evidence it works.
An empirical study on this topic showed interest rates follow growth.
And yet central banks tell us they cause it. Apparently, we’re supposed to believe they are the cause and effect at the same time.
My main concern is that central banks will crush the business model of private banks by holding bank share over the long term.
Shorter term, it’s possible that the regulators will block them from paying dividends to bolster their capital and liquidity.
And loan growth is likely to weaken while the property market remains under stress.
My one hesitation with going full bear on the banks is that Australia’s national sport — leveraging into property — reasserts itself aggressively.
The question: Bank shares: Up? Down? Sideways? Send in your thoughts.
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