Don’t ask me why, but this morning as I was getting ready for work (a whole four-metre walk from the bedroom to the study), I remembered a conversation I had with a taxi driver in Vancouver last year.
It was mid-July and a lovely summer’s day. That perfect blend of warmth on your back when you walk, but not too hot to move around in.
After strolling too far and buying too much, I hailed a cab to get back to my hotel.
Canadians are a friendly bunch. A lot like Australians but with less swearing. A little bit like Americans but less individualism.
My cab driver and I made small talk. The usual stuff. Where are you from and what are you doing here? I mentioned that I was in town for a resources conference, and…
‘Wait, you’re in the market?’ he spun and asked me at the lights.
‘Er, yep, but I’m mostly in gold and gold related stocks. I’m in a fairly niche area of the market’, I replied.
‘That’s fine. I’m not interested in that. Your housing bubble is spectacular. I want to short your banks. What are their names? Which of them are most exposed to the housing sector…’
A couple of minutes later, I was out the front of the Fairmont Hotel. I dragged my purchases out of the cab, and headed back up to the hotel and got ready for an event that night…
They don’t call it the widow-maker trade for nothing
It’s been more than a year since I was in Vancouver. I find it rather amusing that out of all the memories to dig up, that was the one my brain chose to drag out.
Obviously, I haven’t seen the cab driver since. But now wonder how he went. If he found a way to short the Aussie banks…and like many a professional trader, did he find out the hard way why they call shorting the banks the widow-maker?
A widow-maker trade is generally the sort of trade that ends in large, perhaps even catastrophic losses, as a particular asset defies fundamentals and the market consensus.
Let’s say my cab mate did find a way to short the Aussie banks. How did he go?
Top six Aussie banks
July 2019 to May 2020
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| Source: Trading View |
Throughout last year, the Aussie banks continued to defy the news around them. So, my new bud would’ve lost a buck or two.
They don’t call it the widow-maker trade for nothing.
The thing is Aussie banks have been far more resilient than most market punters expected.
The collapse in Aussie prices never really materialised last year.
And even though personal credit growth in Australia was already falling in 2019, growing at nearly the slowest rate in a decade, there’s still an increase in overall private credit growth.
That is businesses and people outside government taking on new or refinancing existing loans.
Aside from a few bumpy months, issuing of new credit that drives a banks expansion has never really faulted. The Aussie banks have largely held up.
However, there are some bigger changes afoot that suggest things aren’t well within our banking sector.
Out to protect the people or the banks?
Some 500,000 Aussies opted to take a loan holiday at the start of the pandemic. Meaning roughly half a million people have deferred payments on more than 900,000 individual debt arrangements.
Come the end of October, 180,000 of them are up for review if the deferral should continue.
While the Aussie banks didn’t really bounce back to their pre-pandemic high, I’m not entirely sure the full value of the economic destruction has been factored in.
In the next 6–12 months more will be revealed about the damage to the banking sector.
How many of those loans will resume payments? We don’t know yet. The lifeline from the Reserve Bank of Australia means the extra cash being offered to banks will enable them to lend for longer.
Perhaps many can’t be paid back.
During an editorial meeting earlier in the week, one of my colleagues said he’s hearing whispers that a disproportionate number of these loan deferrals aren’t picking up the phone when the bank calls.
The slow withdrawal of JobKeeper and JobSeeker begins now. The end of government money supporting a fake economy is here.
The RBA isn’t the only lifeline out there either.
The New Bankruptcy Law in Australia
This week, new legislation passed parliament to introduce a ‘chapter 11’ style bankruptcy law in Australia, to ease the burden for businesses as they default on their loans.
On a similar note, the ABC reported that there were not enough liquidators to deal with corporate defaults.
A wave of debt defaults is predicated from the private sector.
There are more than 105,000 business loans to small and medium firms with deferred payments. All of these are due for reassessment by the end of October.
That’s just the official business loans. Anyone who has worked in lending will tell you that sometimes business owners have a couple of credit cards and a personal loan as well to support their business.
While the changes to bankruptcy legalisation appear business friendly — hopefully they give many small firms some breathing room from creditors.
But the concern is it’s not just about giving the small firms the chance to trade out of a tough patch…it’s more about the government doing what it can to prevent Aussie banks reporting massive losses.
Until next time,
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Shae Russell,
Editor, The Daily Reckoning Australia
PS: Free report reveals why Australia is set to become the next ‘gold epicentre’ — which could result in a HUGE spike in Aussie gold stock prices. Click here to learn more.
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