The Mad Inflation Happening Now — It’s a Wall Street Bailout

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It’s a Wall Street Bailout - Inflation Happening Right Now

Today’s Profit Watch begins locally before expanding out the focus, like the aperture control on a camera. The picture gets clearer that way.

And what a pair of stories we have to open with this merry morning. The Australian Financial Review reports that company directors on the ASX are calling for a ban on class actions.

And what do we also discover? Customers are serving the Commonwealth Bank of Australia a class action!

It’s another skeleton under the floorboard as far as the CBA goes. It’s to do with insurance sold in years gone by. The precedent is there. NAB got hit with a $49.5 million payout in similar circumstances.

How will this CBA suit go? I have no idea. All I know is it’s more legal fees and potential fines for the bank. That’s not something any bank needs right now.

It’s not as if business is booming out there. The latest data from the Australian Bureau of Statistics show lending fell in April at its fastest rate in five years.

Granted, this data is both lagging and at the height of the lockdown. But it’s not likely to scream higher anytime soon.

Then we have the lingering problem of all those people on JobKeeper and under loan deferrals.

The Australian Banking Association says there are a total of $232 billion in loans deferred right now. This is a mighty wrestle for the industry.

That’s not all. The government and regulators are giving the banks a free pass right now by not demanding they classify these loans as in ‘arrears’.

However, at some point the banks have to acknowledge whether these loans are good, bad or indifferent, and book it in their accounts.

The truth seems to be nobody has any idea what level of bad debts there could be. It could be mighty costly and time consuming to work it all out too.

The worse the situation, the less likely the banks can sustain their dividend payouts we’ve all grown used to.

Then there’s also the pickle of whether banks are value, or a value trap. The recent rally sees Australian banks trading on a generous premium to book value when compared to their overseas counterparts.

That looks optimistic when their return on equity is mediocre and the entire yield curve in Australia is at risk of going negative.

What could cause such an outcome? One scenario is a major collapse in the US dollar. While everyone is mesmerised by the rise in the NASDAQ, it helps to remember it is based on massive Federal Reserve credit creation.

Look at the numbers: Wall Street on Parade puts the cumulative total of Fed loans to Wall Street at US$9 trillion dollars. That’s at below market rates too.

Hence why so many people say the financial markets are divorced from the ‘real’ economy. Presumably the Wall Street banks and trading houses will soon start cashing in their capital gains, or will have exhausted selling their junk assets to the Fed and US Treasury. Perhaps then the punchbowl will be removed.

Whatever the case, the Fed is neither honest nor fair in its presentations to the US public that it’s helping families and small businesses. It’s a Wall Street bailout that began in September 2019 — long before COVID-19 was a ‘thing’.

But, pray, what hath any of this to do with Australia? The excess US dollar liquidity is not just driving up the NASDAQ; it’s taking the Aussie dollar up too.

The flows could continue. An appreciating currency gives Australian bonds an added allure to foreign buyers already dealing with zero rates in their home market: you can get positive yield and a gain on the currency.

This has the potential to take the Aussie dollar higher again. It will also place pressure on the RBA to go negative.

We’ll see on this. But the Fed cannot pump trillions out into the markets and there not be ‘second order’ affects. You can see it in the US gold market.

It hit another strong bid of US$1,734 overnight. It’s probably heading to US$3,000 over the long term as this mad inflation runs riot.

At some point money is going to pour out of the US bond market looking for a home in anything that can’t be created on a printing press. Gold, land, art, stocks — you name it. All have a date with higher prices.

But didn’t they say the same after 2008? Indeed they did. Same theme park, different rollercoaster. More tomorrow on why.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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