Pascometer burns red on bank bubble

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Regular readers will know that the MB office has a red warning light on the ceiling for trade timing. Called the Pascometer, it is a remarkably useful gauge of when to sell out of an asset, just as Michael Pascoe tells you to buy. Today the Pascometer flashes red on the bank bubble (h/t The Lorax):

So you’re a self-funded retiree cursing the Reserve Bank for cutting interest rates. Don’t. If the RBA has forced you to realise your term deposits are duds, the mandarins have done you a favour.

…As a rough and simplified demonstration using five stocks (not a recommendation), the BusinessDay quotes page shows Telstra closed yesterday with a yield of 5.6 per cent, NAB 5.5, Westpac 5.2, Wesfarmers 4.1 and Woolworths 3.7 – an average of 4.8 per cent. Add the franking credits and the effective pre-tax yield is more than 6.7 per cent. Who wants term deposits?

…The search for yield has been the market’s main theme over the past year and it’s not over yet. The analysts suggesting bank shares had reached a bubble high last week don’t seem to realise that.

Just a small note of correction. Jonathon Mott at UBS, who fired off the debate, did not call the top. He identified the bubble and said he reckoned it could inflate another 10% before warning you to stay clear of it.

Weeoooo, weeoooo, weeoooo.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Pretty sure payout ratios have been on the rise. If anything, dividend yields have become less sustainable.

    I would only buy now if I thought RBA will cut another 75bps. But if they did then it would probably mean the economy is slowing dramatically which would effecting earnings… it’s a dangerous game to buy at the highs.

  2. Yes – that was a superb effort!

    The retirement villages of Sydney are full of tumbleweeds this afternoon as the inhabitants rush to the bank to close out their term deposits and ask their grand kids to get them started on Commsec.

    “Buy me some of those things that nice Mr Pascoe recommends”

    But to be fair, the RBA have had the beaters moving through the forest for months now with their low interest rate sticks chasing all the risk averse pheasants out into the open where they are soft targets for real estate, spruikers, debt merchants and stock brokers.

    Pascoe merely put his ear to the train tracks, Native American style, and has heard the rumble of the ZIRP express approaching.

    • Brilliant analogy, will share with business professor (at Soros’s Central European University) who noted Australia’s drop in interest rates as an attempt at pump priming.

    • I like that imagery Pfh007. Sometimes people just have a neat way of putting things, or cutting through the fog, & there’s been some good ones on MB.

      H&H how about a page for Quality Quotable Quotes?

      And one for Incisive Comments….

    • “But to be fair, the RBA have had the beaters moving through the forest for months now with their low interest rate sticks chasing all the risk averse pheasants out into the open where they are soft targets for real estate, spruikers, debt merchants and stock brokers.”

      great!

  3. If you need a weather vane for your office, there is John Collet

    May 2nd: Popping claims of a banking bubble

    Talk of investment bubbles are always great for headline writers. But like the Great Australian House Price Bubble that never was, a grain of salt should be taken with the dark forecasts that we are in the midst of the Great Bank Share Price Bubble.

    May 7th: Rate cut could fuel high-yield ‘bubble’

    The danger is that investors’ love for higher-yielding stocks will push their share prices even closer to ‘‘bubble’’ territory.
    Concerns have been building that a bubble may be developing in the higher-yielding shares, such as the big four banks, Telstra and property trusts.

    Watch out IKEA..

    • The yield bubble is what many of us are thinking. The people that Pascoe is criticising will pour their cash savings into overpriced assets chasing yield.

      When the yields drop or interest rates rise those asset values will crash. No doubt Pascoe will then release another article telling everyone why they went wrong chasing yields.

  4. innocent bystander

    well, I just recently renewed some term deposits. I know the capital is safe(?) and the “dividends” will be paid and when.
    For my money the risk isn’t priced into bank stocks – the current yield is modest for the risk and the yield means nothing if there is substantial capital loss – and those dividend dates stick out like sore thumbs.

  5. “…who wants term deposits?”

    Ah, this kind of crap grates me. ….Valuing assets based on how much they pay out, treating franking credits as the ultimate holy grail….all with very little consideration to actual earnings.

    I don’t know what is more frustrating; the journalists/commentators spreading this crap, or the consumers who buy into it without knowing what they’re actually buying.

    It’s all about focusing on noise that has bugger all to do with the bigger picture.

    (of course Pascoe’s not the only one. In fact he’s one of the better of a pretty mediocre bunch. Don’t get me started on Greenwood & Kochie)

  6. i do recall him peddling westpac shares 2 years ago just after the latest greek scare. Would have paid off handsomely so he’s not always wrong. but then neither is a monkey rolling a dice. Its all guesswork really. Just buy ETFs and get the weighted average of everyone’s best guess without the high fees and need for an accountant at tax time.

  7. I’m not sure what is going on here – Pascoe isn’t right all of the time, but he’s certainly been right on banks in recent times. Those of use who followed his advice when CBA was at $50, and is now at $70+ have done very well.

    He has reality on his side. You have………..your predictions??
    I’ll stick with the way that makes money thanks.

    • boobooMEMBER

      So how did following Pascoe’s advice in 2007 and 2008 go for you? It takes a brave (and wrong) man during middle of the GFC to just call it a “blip”.

      And for staying out of gold for the last 10 – 15 years, how about that?

      Or his never stories on what will be the never ending “Chindia” boom just a few years back. How quickly he is backflipping on that now, apparently China slowing is now “good”, despite claiming previously it won’t happen.

      Pascoe is just a money making machine with that track record of good calls!

  8. Home run. SMH should get rid of MP and Gittins and save a bundle. But the luvvies can’t get enough of these guys.