RBA Claims Australian Banks Conservative

We only have a brief edition of Money Morning today as we’ve been distracted by preparing a special update for the Australian Small Cap Investigator, and adding some further touches to the new income newsletter…

Writing of which, we should be ready to launch in late June or early July, so keep an eye on your inbox for further news.

Following on from yesterday’s Money Morning, we’ve received a number of emails from readers about other “tax effective” schemes promoted by financial planners and accountants.

One of them – would you believe it – was a non-property related scheme being promoted by a real estate agent!

We recall an apocryphal story from some years ago that says “once you start getting stock tips from the bellboy you know it’s the top of the market.”

We wonder if the same goes for real estate agents and tax-effective investments. Surely it can’t be the top of the market already!

But it got us to thinking, if you’ve received something which seems too good to be true from your accountant or financial planner, send it through to the Money Morning Mailbag at moneymorning@moneymorning.com.au and we’ll take a look.

We won’t go through all of them, and we won’t lay claim to making a Today Tonight style ’scoop.’ But we would like to see further examples of what the average financial services ‘professional’ is sending out in the days before the tax year ends.

Based on what we’ve seen so far, it wouldn’t be stretching the imagination to say they closely resemble the business model and balance sheets of the likes of Great Southern and Timbercorp…

Loads of ‘assets’ valued at whatever price they like, financed by retail investors and debt.

The trouble is, the assets only have a value if someone is prepared to pay that price. Once these agricultural investments start over capitalizing just so they can rake in more cash and charge more fees it is bound to have an impact on the price of their ‘product.’

It’s simple supply and demand. It’s not even fifth grade science, let alone rocket science.

We’ll have more on this subject over the next few days. Plus we’ll provide further evidence that Australian banks do not have a superior balance – in fact, there’s a chance they could be in a much worse position than their international peers.

But before we go, a quick look at RBA governor Glen Stevens’ speech to the James Cook University’s Business Excellence luncheon last week.

These comments towards the end of his speech struck a chord:

“It is the intention of current monetary policy settings to lower debt-servicing costs, assist efforts to reduce leverage and support demand. It would be counterproductive, though, if further reductions in interest rates induced a large number of marginal borrowers into debts they could service only at unusually low interest rates. This is a reason for care, both by the Reserve Bank and private lenders, and I note that lenders are being a bit more conservative on non-price loan conditions for households.”

I’ve underlined the most interesting parts of it – which is nearly all of it!

We aren’t quite sure what he means by “if further reductions in interest rates induced a large number of marginal borrowers into debts they could service only at unusually low interest rates.”

Is he not familiar with the first homebuyers grant? If that hasn’t ‘induced’ many (not all) marginal buyers into the market we don’t know what has.

And as for lenders being “a bit more conservative,” clearly his accountant hasn’t sent him the latest offer from Rewards Group offering 100% financing from the Commonwealth Bank to invest in grape farms.

But back to the governor’s speech. He used a quite interesting chart…

We think it was meant to show how durable Australia has been during the global recession whereas those countries that have been strong in manufacturing have suffered, namely Japan and Taiwan.

But take another look at the chart. Notice how, with the exception of Spain and France, the top left hand corner is dominated by the Anglo-Saxon countries of Australia, UK, US and Canada.

Those are the same countries which have leveraged themselves to the eyeballs over the last twenty years and which are now facing down the barrel of future years of debt and inflation.

While those countries in the lower right have proven to be the manufacturing engine rooms of the last twenty years. So although they may have suffered somewhat from the global slowdown, they at least have built their economies on saving and production.

It is these nations that will continue to be the engine room and will also provide the next growth spurt of consumerism as well.

As for Australia? Well, we’ve written before about the free-kick it’s been given because of China and the resources boom. That will continue and Australia will benefit.

But make no mistake, Australia is not in its relatively comfortable position due to our banking system. The mainstream media, commentators and policymakers would have you believe that it is…

It couldn’t be further from the truth.

Other Stuff on the Markets

The S&P/ASX200 fell by 0.9% yesterday, while overnight on Wall Street the Dow Jones Industrial Average fell 1.43 points. And in Europe the FTSE100 fell 0.43 points.

The price of gold in Australian dollars is trading at $1,194.08, while in US Dollars it trading at $955.50.

The Aussie dollar strengthened versus the US dollar and Japanese Yen, trading at USD$0.8013, and JPY78.03.

Further strength for Crude oil overnight, closing at USD$70.46.

For the biggest movers on the market yesterday click here…

And today on the economic calendar we have Westpac Consumer Confidence, and Housing Finance.