We had panic selling on Friday and Monday.
It’s likely we’ll have relatively calm selling today. US stocks and oil steadied in overnight trade. The Yanks are back from their Thanksgiving turkey.
I don’t mind days like yesterday. I find them instructive. Which stocks got bought up on the day? Which ones didn’t sell down at all?
I can’t tell you the answers to all of that. But I did notice that mortgage lender and broker Australian Finance Group Ltd [ASX:AFG] didn’t move much.
Now, context is important here. AFG had already sold down in the previous month or so. Most real estate stocks in a similar vein have too.
But they released their AGM presentation last week. It makes for an instructive read.
The big banks are lifting their fixed home loan rates. This is after fixed rate loans surged thanks to the RBA’s cheap funding in response to the COVID collapse.
Now the market will switch back to variable rate debt. AFG says that should be tailwind for the non-bank sector.
They might have another advantage now too. APRA, the banking regulator, says that big banks will have to hold higher capital levels against certain types of property loans.
See the following comment in the press release:
‘APRA Chair Wayne Byres said an unquestionably strong banking industry is central to the stability of the financial system.
‘Capital is the cornerstone of the banking system’s safety and stability. It protects depositors during periods of stress, ensures banks can access funding, facilitates payments and helps banks to keep lending to their customers during good times and bad.’
This service is called The Daily Reckoning. Our mission is to give you the story the mainstream press and powers that be will never tell you.
Here goes it…only a fool would believe the above quote. Any study of history will show it for the garbage it is.
Capital is not the cornerstone of the banking system’s safety.
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What is?
The type of lending banks do.
If they lend to productive businesses, then that makes for a very secure banking system.
However, if banks make lots of unproductive loans — to real estate speculators, for example — then the banking system is built on very weak foundations.
You don’t have to believe me on this. Regulators have been tinkering with capital levels since the 1980s.
That’s why the current ‘reforms’ come under the umbrella of Basel III. There was a Basel I and II before this.
And in the same time frame, banks have collapsed in the Asian Financial Crisis in 1997 and the US in 2008. Lehman Brothers had more than enough capital (or so it thought) before it went bust.
There was a study done some years ago called The Great Mortgaging.
It showed economic recessions were the worst after real estate collapses.
Why is that? Because banks become very weak if their property loans go bad, and they pull lending into the general economy.
Why would their property loans go bad?
It’s the same old story since an asset market formed in land.
Swapping ownership certificates can be very profitable. But it is unproductive mostly. It doesn’t generate income to service the debt.
A history of property cycles shows that, in the end, people pay stupid prices to own real estate that can never be justified by the fundamentals.
Something comes along to wake society up from the collective madness. So confidence and buying evaporates. And all that’s left are huge debts and broken dreams.
Banks are left with gigantic levels of dodgy loans. High capital buffers cannot save them when the economy is gurgling its way down the toilet.
That’s what history shows. I couldn’t give a damn what APRA says on this issue.
The only way to make Australia’s banks truly secure would be to ban the creation of credit against land value.
That ain’t going to happen…
Look how loaded Aussie banks are with mortgage debt:
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Source: Australian Financial Review |
It’s a very profitable system too. Big Four bank profits were over $20 billion last financial year.
Give it five years or so and you’ll see the folly of believing APRA’s guidance on this issue.
But by then, I doubt anyone will give a damn. Everyone will be too busy trying to rip more gains out of property to realise the whole shebang is about to blow.
Best wishes,
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Callum Newman,
Editor, The Daily Reckoning Australia
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