Popping The “Central Bank Bubble”

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The Secret Bank Loans saga continues. Your editor has lodged a Freedom of Information (FoI) request with the Reserve Bank of Australia (RBA).

From what we’ve been told, the RBA has thirty days to process our request.

In a nutshell we asked for all internal and external communications from and to the RBA about National Australia Bank [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the US Federal Reserve.

I’ll keep you posted on what happens next.

In the meantime, to amuse ourselves, we’ve trawled the RBA website to see what the Bank had to say about the health of the Australian banking sector during 2008 and 2009.

The best quote we could find was this from assistant governor Malcolm Edey in March 2009:

“I should stress, by the way, that Australian banks have been much more prudent than their overseas counterparts, and they have remained in sound condition throughout the crisis period.”

Yeah, at that time NAB had just borrowed it’s third amount of USD$1.5 billion from the Fed.

But still, the mainstream press fell for Edey’s claim hook, line and sinker at the time. We now know of course, thanks to the US Federal Reserve that Australia’s banks weren’t in a “sound condition throughout the crisis period” at all.

We know that because NAB and Westpac borrowed over USD$5 billion between them, and the RBA itself borrowed USD$53.5 billion from the Fed which it presumably used to bail out the local banks.

That aside, it seems our email to the Australian Securities Exchange (ASX) got stuck in the Interweb pipes somewhere – oh for a $40 billion national broadband network! – so we gave them a call this morning and have resent the email.

We’ve been told by the ASX, “Our Corporate Relations department acknowledges receipt of your expressions of concerns and will revert to you shortly regarding the progress of your query.”

Blimey, we’d just be happy if they replied. We’re not sure the RBA needs to “revert” to us as they weren’t us to begin with. But never mind. Who are we to comment on grammar? We been known to make the odd mistake.

Anyway, our level of expectation is pretty low. We honestly don’t believe the ASX is going to pull-up either bank on the lack of disclosure. And we can’t imagine the ASX will admit to having known about and suppressed information on the secret loans at the time.

Which would be pretty amazing considering how quick the ASX is to jump on most other companies if there’s even a whiff of non-disclosure.

We’ve even received a couple of emails from ex-CEO’s telling us how the ASX hounded them to disclose information to the market. And we see speeding tickets all the time, especially to small-cap stocks, asking the companies if there’s anything that should be made known to the market.

That two big banks can get off scot-free for not disclosing a USD$5 billion bailout from a foreign central bank would be amazing.

All we know is that it’s time for someone to do some independent forensic accounting on the banks. And seeing as no-one in the mainstream is prepared to do it, it looks like your editor will have to devote some of our spare time to the task – providing it doesn’t take away important research time for Australian Small-Cap Investigator of course.

I’ll keep you posted on how all this goes. In the meantime, what about those markets…

Money Morning reader Marko drew our attention to a lovely bit of mainstream mumbo-jumbo. It was in Glen Mumford’s Market Monitor column in yesterday’s Australian Financial Review (AFR).

We’ll confess to not having read it, but according to Marko, Mumford wrote:

“Sometimes it’s bad news, not good, that turns a market higher. So when I saw the US unemployment rate had unexpectedly jumped to 9.8 percent, I lifted my year-end estimates for the global indices…

“I see this as great ‘bad’ news for investors.”

We’re far from being surprised at the topsy-turvy logic of mainstream commentators. They go from one ridiculous statement to the next.

It’s funny how your editor is labelled a lunatic and nutter for questioning the mainstream view on the housing bubble, on the non-existent housing shortage, and on the fragility of Aussie banks, yet a mainstream commentator gets to write nonsense such as the stuff written by Mr. Mumford and it’s seen as sober economic analysis.

Analysis where good news is great and bad news is… at least good… but sometimes great as well.

It’s this kind of warped thinking that should keep you on high alert with this market. As I’ve said for some time, don’t be suckered into having too big an exposure to the stock market.

Sure, there’s a chance we could see the market rally through the New Year – the Santa Claus rally cliché – but it shouldn’t be banked on. And even if it does happen it won’t guarantee that markets will keep rising.

The past two years are proof of that. The market rallied through the end of the year, but then sunk like a stone afterwards:


Source: CMC Markets Stockbroking

Of course, in 2009 the market did pick up again as it soared over 50% in six months. But one year later from the November 2009 peak and ten months after the last Santa Claus Rally, the market is trading lower. Buy and hold investors who bought in expecting Santa Claus to weave his beardy magic have been sorely disappointed.

But back to Mr. Mumford’s comments. Look, he’s not the only one to take that line. They’re all at it. When there’s good economic news the commentators say that’s good for the market.

And when there’s bad economic news they say that’s also good for the market. But why? How can bad news be good news? And how can it be possible for stock markets to rise in both cases?

It’s simple, the mainstream numpties have lost their minds. They’ve lost all idea about how an economy works and how wealth is created.

They now seriously believe that if an economy can’t grow of its own accord then central bankers can make it grow – by printing money.

That’s what it comes down to. The markets now see any bad news as an excuse for the US Federal Reserve to turn to the printing presses. Because in their mind, more money means more spending and more spending means higher asset prices and greater wealth.

Sure, I’ll admit that part of that argument could be true. That asset prices could see a massive price spurt – in fact we’re playing for that possibility with our Australian Small-Cap Investigator tips. But where we differ from them is our view that they won’t get the outcome they think they’ll get.

There’s no guarantee that it’ll lead to more spending – in fact we hope it doesn’t. And even if it does have an impact on asset and commodity prices, chances are it will only be temporary. And it most certainly won’t result in greater wealth – or not for most people anyway. The bankers and bureaucrats will do fine – as always in a corrupt system – but most everyone else will lose out.

But we’re prepared to take a punt that stock prices will move higher. Although we wouldn’t bet our house on it. And you shouldn’t either. We certainly wouldn’t be over-exposed to the stock market as most mainstream advisers would recommend.

In fact, personally we’ve got less than 20% of our liquid assets in shares. And we’re quite comfortable with that thank-you-very-much… but we’re also ready to dump even that small amount if we think the market is set to head south.

The reason for that is how the stock market is being manipulated right now.

As you know, the US Federal Reserve has a policy of quantitative easing (QE), even though it doesn’t like calling it that.

In simple terms, what the Fed is doing is creating new money by keying in a few numbers into its balance sheet. Once it does that it buys US government bonds on the bond market.

The theory is that this newly created money will be used by investors to buy assets including shares and other commodities. Plus, because the Fed is acting as a guaranteed buyer of government bonds, investors are happy to buy new issues of bonds direct from the US Treasury.

That in turn guarantees that the US government will be able to raise the money it needs to finance its spending programmes.

But what started out as infrequent buying by the Fed has turned into something more frequent. In fact, the Fed is now buying US government bonds every day.

Aside from the Thanksgiving Day holiday and the days either side of it, the Fed has bought US government bonds every day since 12th November.

Since that date the Fed has bought roughly USD$95 billion of US government bonds. Estimates were that the Fed would buy around USD$100 billion per month until next June.

That would be enough to cover the USD$600 billion set aside for QE2, plus extra to continue the so-called reinvestment in government bonds of funds realised from the maturation of residential mortgage-backed securities.

It’s surely no coincidence that since then the market has rallied higher from what our technical analyst, Slipstream Trader Murray Dawes says is a crucial level on the S&P500 index at 1,174:


Source: Google Finance

And that’s the thing. Aside from the Fed creating electronic money from thin air in order to buy government bonds and help prop up the stock market, we see little evidence of any other reason to buy stocks – not unless you’re prepared to take a few high risk and short term swings at the market that is. Although fair play to him, Diggers & Drillers editor Dr. Alex Cowie has played the recent commodity boom like a peach, bagging a number of big winners for his readers.

But I still say it’s not the market to just buy at any old price. And on that score the Stock Doc and I agree.

As I’ve written before, there’s now chatter on the markets about the Fed looking at doing a QE3. In other words, extending the bond buying programme and creating even more new money from thin air.

But at what point does this become old hat for investors. At some point the Fed’s buying will reach a stage where it needs to create ever greater amounts in order for it to achieve the same effect as before. That’s when the buying goes exponential and investors soon realise the game is up and look for the exits… just like with any other bubble.

Of course, the problem – again, as with all bubbles – is knowing when the peak has hit. We’ve picked it for the top of the housing market, but picking the top of the bond and money printing bubble (or maybe we’ll call it a “central bank bubble”) could be a whole lot harder.

The simple message is, if you intend on buying stocks do it with extreme caution. And don’t fall for the idea that both good and bad news is good news for stock prices. Plenty of mainstream investors will find out the hard way when the central bank bubble pops.

For our part we note the Perth Mint now accepts online orders for gold and silver bullion… we know what we’ll be doing as soon as we’ve written our weekly update to Australian Small-Cap Investigator subscribers.

Cheers.

Kris Sayce
For Money Morning Australia

Kris Sayce

Kris Sayce

Publisher and Investment Director at Money Morning Australia

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.

Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has more than fifteen years’ experience in analysing small-cap stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.

After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia — but eventually, took over Money Morning. It’s now read by over 50,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money!

Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

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(You can find a list of recent investment articles written by Kris at the bottom of this page.)

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75 Responses to “Popping The “Central Bank Bubble””

  1. Peter Fraser

    dc @ 69 – well they say that they have tightened, so lets just hope they maintain that.

    Do I know you from another forum?

  2. dc

    No I don’t think so

  3. cb

    Thanks, DC. You guys are doing a sterling job, so I will be the poorer for the absence. I will keep checking in over the weekend and then will be offline for a few days.

  4. cb

    Ocean Shores barber

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