Banking dominated the discussion of Australia’s economy this week.
First there was the Reserve Bank of Australia’s interest rate decision on Tuesday. The result was widely expected. The RBA may have painted itself into a corner. And the imbalances building as a result of interest rate manipulation are growing. But does that mean it’s all about to fall apart?
Check out Greg’s thoughts, below.
On the retail side, this week Sam examined the rapidly changing technology of the banking world. How are Australia’s big four responding to the threats of cryptocurrencies, peer to peer lending, and the globalisation technology brings?
Surprisingly well, it turns out.
But even as Aussies obsessed over the RBA meeting, and wrung their hands over ANZ’s modest slip in profits, greater events were building elsewhere. The world waits with bated breath for the results of the second round of the French election.
Will the centrist Macron win in a victory for globalisation and ‘more Europe’? Or can Le Pen harness France’s fears and take the country down a nationalist path, toward a possible ‘Frexit’?
Both candidates are ‘outsiders’.
Macron has formed his own party, whereas Le Pen inherited her position. Until-now this was a rather unsuccessful fringe party, established by her father. The party, and her father, have a chequered past marred by anti-Semitism and accusations of fascism. Le Pen recently distanced herself from the National Front party to ‘focus on the Presidential campaign’. But it’s unlikely she can shake her father’s legacy.
Macron, on the other hand, has established his own party, En Marche!, though his policies remain decidedly mainstream. He argues for both social and economic liberalism. He believes the solution to France’s woes is not a break from Europe, but even closer ties.
The polls indicate that voters are heavily in Macron’s favour. You don’t need me to remind you that polls have been very wrong in a couple of high-profile democratic upsets recently. But it’s worth noting that both Brexit and the US election were far closer contests than this one seems to be. If France does see an upset tomorrow, it will be an extremely strong message to establishment politics, and establishment economics, worldwide.
For now, last minute campaigning continues apace. And your Editor has no idea what to expect. But perhaps I’ll be able to bring you a firsthand look at the aftermath from the street of Paris.
First, a review of this week in Money Morning, below…
This week in Money Morning
The idea that saving is a virtue has long been turned on its head in Australia. With interest rates perpetually low, savers have been punished for years. But Greg explained on Monday that the RBA is unable to raise interest rates while household debt levels are so high.
Disappointing first-quarter economic results arrived from the US this week. Australia’s economy is likely to follow the US, in general. That means strong wage growth isn’t likely to lead the way out of Australia’s debt mire.
So should you be buying gold and preparing for a financial collapse? Greg argues no. Gold performs well in times of monetary extremes. But Greg argues that we’re unlikely to see either deflation, or high inflation. The key indicator to watch is bond yields. For Greg’s explanation of why, and what it means for Australian investors, you can read Monday’s Money Morning here.
With Australia’s big four banks making up a quarter of the ASX, their earning results have the power to singlehandedly move the market. We saw that this week, with ANZ’s growth in cash profit to 31 March coming in just short of expectations.
The banks aren’t just a large influence on our market. They’re also an excellent barometer for it. On Tuesday, Greg looked at how Australia’s ever growing debt addiction has fuelled the banks’ profits, and discussed how much longer such gains can be sustained. He argued that the market is telling us Australia’s banks are likely to keep going strong for a while yet. It’s possible the vast majority of investors are wrong about that, and the current upward trend is about to turn. You can read why Greg believes that isn’t the case in Tuesday’s Money Morning, here.
On Wednesday, Greg looked at a structural shift in global stock markets. Why haven’t we seen the kind of reversion to mean that value-based analysts have expected? For decades, being a value based fund manager was ‘easy’, in the words of value fund manager Jeremy Grantham. So what changed? And does the old saw that things are never ‘different this time’ still apply? Greg argues that sometimes things really are different. To read why, you can find Wednesday’s Money Morning here.
Sam went even further on Thursday. He believes that, far from being overvalued and vulnerable to a crash, the Aussie stock market is set up for another four years of bull market run. Sam believes that you should be investing like it’s 2003, with a massive run ahead of us, rather than 2008, at the edge of a massive cliff. If he’s right, why is there so much pessimism in the media? And, to be fair, in some of his fellow Port Phillip Publishing editors?
Well, Sam argues that there’s always fear in the markets, even when they’re about to take off. And he has the examples to prove it. You can read more in Thursday’s Money Morning.
Sam followed on from things being ‘different this time’, and possibilities for Australia’s banks, this Friday. New technology has a massive potential to disrupt the banking industry. Peer to peer lending, cryptocurrencies and their uses for secure and anonymous online transactions are numerous. Are Australia’s banks prepared for these kinds of shifts in their landscape?
Far from being afraid for Australia’s massive financial institutions, Sam argues that every sign points to this being a massive opportunity. One that they’re already well on their way to exploiting. Sam says Australia’s banks are at the forefront of some of the changes that will revolutionise banking this century. And with the big four carrying so much weight in Australia’s stock market, that could be very good news for Aussie investors. Read Sam’s insights here.
That was it from your Money Morning team this week. Tune in next week for more on Australia’s economy, and how the results of this week’s election might affect it. The consequences for Europe’s future and for global markets will be profound. Don’t miss your Editors’ takes on the result, whichever way it goes.
On a final note, I’ll be flying to Europe on Wednesday, for a few weeks of holiday in France and Germany, followed by a publishing conference. Your Money Morning team will have you covered on Saturdays while I’m away. And if I happen to stumble across any post-election rioting in Paris, I’ll be sure to get a selfie for them to include in next Saturday’s edition.
Editor, Money Weekend
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Numbers of Interest, as of Friday
Aussie Dollar to US Dollar: 73.77
Gold: US$1,233.80 (AU$1,672.72) per troy ounce
Silver: US$16.47 (AU$22.33) per troy ounce
Bitcoin: US$1,569.54 (AU$2,128.19)
West Texas Intermediate Crude Oil: US$44.59 per barrel (AU$60.44)
ASX 200: 5,836.60