The Australian bank bubble debate carries on today with the AFR offering a bunch of quotes from fund managers that you should really pay attention to so they can be avoided. The first quote is from Commonwealth Bank of Australia director Harrison Young:
“Australian banks are doing very well…Despite the anxiety in the market and in the papers, Australia is doing very well and the yields are pretty good, and people are interested in yield.” Mr Young said the Australian banks were not at risk of share price falls like those suffered by international financial institutions during the global financial crisis.
How reassuring. Next is Mr Glenn Hart, co-head of equities at MLC-owned fund manager Antares, who you should cross off your list of prospective fund managers:
“I would say as we stand at the moment a bubble is when something goes up tenfold, or it goes up fivefold, that’s what a bubble is,” he said. “They haven’t done anything like that…If you’ve got something in bubble territory it’s going to drop 80 or 90 per cent with nothing else changing…Even in a global context, a lot of the banks that they’re measured against don’t have very transparent balance sheets – there’s quite a few skeletons still buried in the balance sheets of global banks,” Mr Hart said. “They’re not an exact measuring stick.”
One wonders whether Mr Hart is aware that the big four are equally opaque? With a mortgage book that makes up 60% of lending and black box internal risk weighting models that allocate under 2% capital against it, the leverage calculation of these banks is as astronomical as it is hidden.
Another manager to avoid is Graham Harman, Russell Investments’ Asia-Pacific investment strategist, who at least concedes there is “a little bit of a bubble” but:
“We’re bang slap in the middle of the [consumer price index] range for the Reserve Bank with inflation globally not going anywhere. So that’s the fundamental dimension to quantitative easing and pretty easy monetary policy.”
No, that’s not the fundamental dimension of QE. It is symptom not cause. The cause of low inflation is gross industrial over-capacity and the shift from east to west of what’s left. That’s leaving Western economies with few options for growth and they are making up the difference by pumping up asset prices and demand via money printing. What does that sound like to you?
Next to add to your black list is none other than Dr Oliver himself, from The Age:
For Shane Oliver, chief economist at AMP Capital Investors, there is a risk of its becoming a bubble but “we are not there yet”.
The banks are well managed and increasing their profits. One risk would be if interest rates were to rise. But markets are expecting the next move in interest rates to be down.
Oliver said economic activity remained weak. Further weakness could increase the banks’ non-performing loans and defaults as well as slower lending.
But the rise in bank share prices was not even remotely like the bubble in dotcom stocks in the US in 2000, Oliver said.
Michael Heffernan, a senior client adviser and economist at Lonsec share brokers, is definitely one to dodge:
He said there were seven, good-growth, great dividend-yield stocks that were fairly safe and secure – the big four banks, Telstra, Wesfarmers and Woolworths.
“People say that defensive stocks like these are risky,” he says. “I do not like labels and if a stock is good, it is good,” he said.
And another is Citi analyst Craig Williams who rejected claims of a bubble:
With central banks deliberately forcing down interest rates, he argued the yield on bank shares would remain attractive for a while yet.
‘‘We believe that Australian bank dividend yields will continue to attract investors while alternative investments provide significantly lower returns and the earnings and dividend outlook for the sector remains solid near term,’’ the note said.
‘‘In time we would expect that as inflation expectations increase and as policy becomes less accommodative, yields on low-risk investments will increase and bank share prices will adjust accordingly,’’ he said.
‘‘To argue that a stock is expensive relative to historic levels is somewhat akin to saying “don’t buy a loaf of bread today because it was cheaper 10 years ago”.
So what’s my view? Are Australian banks a bubble or not? I have argued that if you want to invest in property then you’re better off buying the banks. Primarily I argued this on the basis that shares are more liquid so if it goes pear shaped you can get out fast. I would not actually recommend buying either.
“Are the banks a bubble” a silly question, hiding the obvious in open view. None of the above quotes apply a jot of context. It doesn’t matter what you call it, the facts are these:
- the major banks run opaque internal risk weighting models to discount capital reserves against mortgages and pump up leverage
- the prime asset class to benefit is housing which remains at nose-bleed price levels
- 2008 would have blown the banks up were they not saved by massive government support that went far beyond Keynesian counter-cyclical measures. The Rudd government rewrote the regulatory architecture of Australian banking in the form of government guarantees everywhere
- all of those supports remain in place
- the Australian economy can demonstrably support such a banking quango so long as the budget is strong and we don’t care about moral hazard
- but, the Australian economy and budget are hopelessly dependent upon Chinese demand for two commodities which is itself driven by an historic and unsustainable surge in fixed asset investment growth that is increasingly exhausted
- and the answer to this is little conundrum? Our authorities aim to pump up demand for mortgages by cutting interest rates.
The phrase that comes to mind for me is “accelerating towards a cliff”.
