Dear Reader,
What a difference a few days can make in the market. This time last week I said bank stocks looked weak whether you viewed them as a technical analyst or fundamental investor.
Treasurer Josh Frydenberg rearranged their governing rules a few days later! Bank stocks ripped on Friday. Today’s Daily Reckoning unpicks the implications for your investment strategy.
No doubt you saw the reason. Shae brought it to your attention on the day. The ‘responsible lending’ laws brought in after the 2008 crisis are getting scrapped.
Is this the signal to go long the banks? Not so fast. The treasurer would have wrong-footed many traders with that announcement.
It’s possible short sellers were pulling their positions. I’m not sure I see a sustained rally here.
There’s no doubt this new regulatory regime improves the outlook for the banking sector. I’m sure they lobbied hard for it.
But think through this a moment. It suggests to me the powers that be are worried about the credit contraction happening now. They’re trying to juice things up again.
We need to channel the spirit of John Maynard Keynes in the short term. Rate cuts and new rules are like pushing on a string if nobody wants to borrow.
Currently the major activity in the credit market is refinancing. This is existing borrowers using lower rates to lower their monthly expenses.
That’s good for them…but erodes the higher margins banks were previously earning.
Substantial new credit can only come from fresh borrowers, which — this being Australia — are almost always looking to leverage into property.
That’s a tricky proposition right now.
It’s not so certain you can find a renter to pay off your investment loan when employment is under stress and the government handouts are reducing as we go into the final quarter.
I find it hard to believe there’s an army of property investors warming to Melbourne or Sydney night now.
We could definitely see a pick up in Perth and WA. I doubt that’s enough to set off a new credit boom for the banks though.
It’s still a subdued outlook with the ongoing stresses of delinquent loans and low interest rates.
Of course, everything depends on your time frame here. Buying bank stocks in 2020 may look very compelling if you’re looking back in 2025.
But there’s a whole lot of market action to get through those two points. My friend Greg Canavan says bank stocks are as cheap as he has seen them in years.
He adds much of the bad news around COVID-19 must now be in the price. Now we have the government, APRA, and the RBA all chipping in to prop them up in one way or another. Greg’s a shrewd investor so I’m listening.
My worry is that the banks stocks could grind along for a lot longer than you think. Take the British banking sector.
They are still miles from their all-time highs after the crash of 2008. Even a resurgent British property market over the last 10 years couldn’t lift them back up. There are simply too many other headwinds.
My suspicion — and take this with a grain of salt — is that Aussie banks may never regain their former prominence.
That might sound outlandish. But there’s a whiff of the general fighting the last war about them and investor perception. They were so good for so long that it seems inconceivable they won’t return to the way they were.
But the history of finance is replete with former titans falling and not coming back. It’s almost guaranteed.
The inevitable rise of crypto
That’s why capitalism is so dynamic and the share market so hard at times. Yesterday is a memory: it’s the future that matters.
Because even if the Aussie property market recovers and interest rates do too, there is still the irrepressible and inevitable rise of cryptocurrencies, both private and state-backed.
These are coming to dismantle the credit markets in ways we probably can’t imagine.
I’m not saying there are no opportunities in bank stocks at all. But I don’t think they’ll have it as good as they once did ever again.
It is said of banks that they operate in ‘maturity transformation’. They take short-term deposits and use those to fund long-term loans.
But there are huge yields, loans, and financing developing in the crypto market. It’s small fry now but I don’t see it slowing down anytime soon.
Take the example of Tesla. Nobody for a moment thinks it’s the biggest carmaker in the world. But it’s priced as if it is because the market thinks it will be in 10 years. That’s the trap of the banks to me.
The ‘innovator’s dilemma’ says banks will watch developments in crypto but it’s outside their core market so it will be some other company that captures the huge growth looming here.
Crypto has every chance to obliterate the traditional banking sector. That lowers the premium bank stocks can attract going forward. They don’t call it a value trap for nothing.
Best wishes,
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Callum Newman,
Editor, The Daily Reckoning Australia
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