Why the RBA Board Should Be Sacked

In today’s Money Morning…the RBA has created a housing crisis from whole cloth…all care and no responsibility from politicians and regulators…years of easy money coming back to bite retail investments…and more…

ASIC Chairman Greg Medcraft must have a pretty big property investment portfolio. He reckons the out of cycle rate rises by the banks (or two of them, at least) are ‘disgraceful’, according to a report in The Australian.

I’m not sure why he’s commenting on the issue. It’s got nothing to do with him or his role. As far as I’m aware, there’s nothing in corporate law to stop the banks from managing their business in this way.

Someone who should be commenting on the issue — Wayne Byers, boss of bank regulator APRA — is still sitting on the sidelines, waiting to go on if necessary.

Here’s Byers commenting on the property market at ASIC’s annual forum in Sydney yesterday, as quoted by The Australian:

…Byres conceded there was “heightened risk” and the banking regulator would use “various tools available to us” to cool the market if needed.’

Geez, if the regulator isn’t needed now, I think they can just pack up and go home.

Yesterday, I mentioned how nearly 60% of all mortgages written in the past six years were interest only loans. This is reminiscent of the large amount of adjustable rate mortgages that fuelled the US housing bubble in the noughties. When interest rates eventually reset higher, the market imploded.

Investor loan growth also makes a mockery of APRA’s attempts to contain the bubble. In the year to January, investor loans grew at 27.5%!

At the start of 2015, APRA put a 10% cap on investor loan growth. That cap worked for a while, as the growth rate declined during 2015 and the first half of 2016.

But then the RBA, in an epic policy blunder, cut rates twice and reignited the housing boom. And APRA has been powerless to stop the surge in loan growth.

So Greg Medcraft might be disgusted by the banks’ behaviour, but he should be furious at the RBA for igniting the housing market again.

I’m no fan of the banks (really, who is?) but raising rates, even modestly, is about the only thing that will take some heat out of the property market. What they’re doing is sensible.

Really, the regulatory and political management of this country is abysmal. We have a gas crisis, despite having some of the most abundant gas reserves in the world. And we have a housing crisis despite having the most abundant land resources in the world.

And who’s accountable? No one. It’s all care and no responsibility for the politicians and regulators. There’s certainly no one bold enough to take the RBA to task. If there is one regulatory institution that deserves greater scrutiny, it’s the RBA. Their influence on the economy is profound.

The board should be sacked for economic mismanagement. Or at least questioned by people who know what they’re talking about. Instead, they get a twice yearly ‘grilling’ by members of Parliament. It’s a circus act.

In the world of consequences

Meanwhile, in the world of real markets, where actions have consequences, the actions of the RBA are about to come full circle for Australia’s retailers.

The rate cutting cycle over the past few years has fuelled a housing construction boom, which in turn has helped to boost profits of retailers like Harvey Norman [ASX:HVN] and JB Hi Fi [ASX:JBH]. New homes and apartments need new furniture, electrical equipment and whitegoods.

But judging by the recent share price action of these two retailers, the virtuous cycle may be coming to an end.

Let’s look at HVN first. Yesterday, the share price plunged 8.2%. It’s now trading at the lowest level since July 2016. This chart is telling you that profits have peaked for the cycle.


Source: Bigcharts
Click to enlarge

It doesn’t appear to be just a story about HVN. JBH’s share price is telling you the same thing. Take a look:


Source: Bigcharts
Click to enlarge

Both stocks made highs around September last year. After correcting, subsequent rallies failed to beat those highs, and now prices are making new lows in unison.

That tells you the cycle has peaked. It doesn’t tell you about the severity of the coming slowdown, but buying here on the expectation of picking up a bargain is a low probability play.

The other thing spooking investors yesterday was a report that highlighted the upcoming threat of Amazon’s entry into Australia.

This is the double-edged sword of the RBA’s easy money policy. Both HVN and JBH earn attractive rates of return on invested capital. That’s an enticement to competitors to come and get a piece of the action.

Given Amazon’s business model, meaning it doesn’t have to have a physical (and costly) shop front presence to compete against the incumbents, it stands to earn very attractive rates of return.

And that will be to the long term detriment of the other players. They’re all pretty much selling the same thing. They compete on price, and not much else. The player with the lowest costs is able to offer the lowest prices, which increases turnover, scale, and profitability.

With interest rates at the bottom and starting to creep higher, and increased competition on the way via Amazon, you need to be wary of investing in the retail space right now.

Last week’s ordinary result from Myer [ASX:MYR] is indicative of that. Private equity sold Myer to investors at a share price of $4.10 in late 2009. It slumped on the first day of listing and has never seen that price again.

The stock hit a low of 85 cents in September 2015, and is now trading around $1.10. That’s a 73% hit for initial investors, not including dividends.

Buying large companies from private equity is rarely a good idea. There’s a reason they want to sell…

Regards,
Greg

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Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

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