Yesterday the US market soared in the last few minutes of trading. Today it choked in the last few minutes. Everyone is always looking for a reason why the market does certain things.
The main reason it went up yesterday was because more people were prepared to buy at the prices quoted. The reason it dropped late on today is because more people were prepared to sell at the prices quoted.
The 0.5% rate cut by the US Federal Reserve was already built into stock prices so it isn’t entirely surprising that there was little further upside…
The interest rate story here could be a little more interesting. As of yesterday there was still a 100% chance of the RBA cutting interest rates by 0.5%, leaving rates at 5.5% next week. If you believe the futures market.
More interesting is that the futures market still has a 94% probability of a bigger cut to 5.25%. What we don’t know is whether institutional investors have fully priced that into stocks.
In a speech that Deputy Governor Ric Battellino gave in Sydney this morning it seems as though he is trying to cool expectations. He said, “We have acted pre-emptively in reducing interest rates. Nonetheless, there is still a big task ahead to bring inflation down and this could limit room for manoeuvre on monetary policy.”
The question we ask is, why reduce interest rates if inflation is still a problem? Which it is. Instead of focusing on a long term and the more insidious issue of inflation the RBA have been caught up in trying to address the short term problem of the credit crunch.
RBA Says Home Balance Sheets Strong – Are They?
Also in the speech, Battellino claimed that the average household financial position was strong. As he presented it in the following graph it is a fair comment.
However, is the graph fair. For a start he has combined short and long term assets and liabilities. If we subtract Superannuation from the balance sheet we can clearly see that liabilities exceed assets.
Considering most people have paid off their mortgage prior to retirement and that Super can’t be accessed until retirement then it skews the argument by including it in household finances.
So the position for households at the moment is a lower value of liquid assets, with debt repayments remaining roughly the same, inflation rising and uncertainty about job stability.
It isn’t the kind of environment that suggests consumers will be getting revved up anytime soon.
Become a Bank For a Day
“Your mortgage trust fund frozen? Go to Centrelink.”
“You want your customer’s accounts to be government guaranteed? Become a bank.”
Expecting that politicians would solve the credit crunch was never going to work. Especially as they are partially to blame for the whole mess in the first place -along with over-zealous bankers and over-confident borrowers.
Finally it seems as though the mainstream press are coming round to our way of thinking. Gone is the adulation for PM Rudd ’solving’ the crisis. Gone are the claims that “this is the sort of thing he likes to get his teeth into”. Now the realisation has hit that the government is making it up as it goes along.
Not that Malcolm Turnbull is covering himself in glory. First he suggested a $100,000 bank guarantee. Then he supported the government’s unlimited guarantee. Now he claims that his original idea was better after all.
The front page of today’s Australian Financial Review tells us that fund managers have given the “Become a Bank for a Day” plan the thumbs down. It isn’t surprising. With all the money that can be made from banking we would have thought the likes of AXA and AMP would have become banks before now – if that’s what they really wanted to do. But they haven’t.
We can assume it is for the same reason that a panel beater doesn’t become a bank either. Because they neither have the inclination nor the experience to do it.
Bankers to Get $18 Billion Bonus?
It isn’t just here that the pollies are chasing their tails. The New York attorney general has fired off a letter to nine US banks that have already, or are expected to, receive part of the USD$700 billion slush fund.
The letter to the Citigroup board of directors asks for the bank to “immediately provide us with any and all information concerning your firm’s expected bonus pool for this year, both prior to and after you understood that the firm would be a recipient of taxpayer funds pursuant to the Troubled Asset Relief Program (”TARP”).”
We don’t know what the Citigroup bonus scheme involves, but according to the UK’s Daily Mail Goldman Sach’s “443 partners are on course to pocket an average Christmas bonus of three million pounds [AUD$7m]” each.
Yet again the fault of this will be put at the foot of capitalism. But that would be wrong. Instead it is the fault of government intervention and human nature. If the government hadn’t vowed to prop up these banks then the big bonuses would probably not have been paid. Or if they were still paid the management would have shareholders to respond to and no-one else.
The odds are that anyone in the position of the bank executives would do the same thing. They are going to see what they can get away with.
Cheers.
Kris.