On Monday you’ll recall that I wrote how banks create money/credit on your good name. And as it costs them effectively zero to create this money, they should not be generating the type of returns they do.
Instead, I wrote, they should earn a much more appropriate return:
‘What is an appropriate return?
‘In a highly efficient and competitive market, it should be something just above a banks’ cost of capital. For Australian banks, a rough estimate for the cost of equity capital would be around 7–8%. Banks therefore should earn closer to 8–9% returns on equity.’
I’m not the only one thinking this way. In yesterday’s Australian Financial Review, the columnist Chanticleer referenced ME Bank when he wrote:
‘ME delivered a return on equity of 8.1 per cent in the 2018 financial year. While that’s well below the 14 per cent ROE that the country’s biggest banks have long enjoyed, it is well inside the target band of an 8 per cent to 9 per cent return that McPhee’s shareholders – industry super funds – are after.
‘And with the royal commission providing regular reminders of how banks have chased profits ahead of compliance and their customers’ own interests, McPhee suggests it is time for a debate on the question of what is a reasonable return in this sector.’
I would argue that the provision of credit in a modern society is a social good. Just because banks have a government-mandated licence to create credit, doesn’t mean they should be able to reap inordinate profits from the privileged.
Either make more banking licences available to drive competition, or ensure profits are not exorbitant by limiting fees and charges. Banks clearly levy these charges simply because they can. They effectively operate in cartel.
Rising energy prices
Another essential service that isn’t working as it should is energy. Electricity and gas bills are soaring. Part of the problem is rising energy prices. This is especially so for gas.
Since building an LNG export industry in Gladstone, Queensland, Australia now sends its formerly excess gas to Asia. The problem is that the LNG terminals need more than just excess gas to operate, and they are sucking up supplies that would have previously been available to the east coast market.
This is sending prices to historically high levels, along with gas and electricity bills. But that’s not all the story.
An investigation into Victoria’s retail energy prices, published in August 2017, revealed some startling information about just what makes up the bulk of our energy bills.
It gave the example of a representative residential bill from May 2017 using 4 MWh p.a of electricity. The total bill was $1,459. But of that amount, the wholesale charge (the actual cost of the energy) was just $266 dollars, or 18.23% of the bill.
The retailers charge was a whopping $489, or 33.5%, and the network charge came in at $409, or 28% of the bill.
For a residential gas bill of $1,462, the wholesale cost of the gas was $385, or 26.3% of the bill. The retail and network charges both came to $472, or 32.3% each.
Consumers are getting stitched up massively. And the politicians and regulators are getting played. No wonder foreigners have bought up most of the east coast gas and electricity network. It’s money for jam!
And the major retailers can game the system by spending heavily on marketing and advertising to dominate the market, and then recoup those costs via exorbitant charges that are not itemised on the bill.
The only way to beat this system is to constantly shop around for new offers. If you stick to your current plan for too long, the offers and discounts drop off and you start paying more. The retailers rely on that good old human quality of apathy. And because the offers are so confusing and hard to compare, they want you to just say it’s all too hard.
So do yourself a favour and check your offer today. If you change or upgrade it, you could save hundreds. I’ll certainly be doing it.
You could also check out my latest report on a zero emissions and forgotten energy source that Australia happily ships to the rest of the world, but doesn’t use any itself.
If I’m right in thinking this form of energy is at the start of a new bull market, a few key investments could potentially offset years’ worth of extortionate energy bills.
Energy networks owned by foreigners
To sum up then, let’s have a look at the energy debacle that has occurred on both Liberal and Labor’s watch…
A new LNG export industry sends huge quantities of gas north to Asia, which sends prices of local gas sky high and threatens the viability of energy dependent manufacturers. As the LNG plants are mostly foreign owned, the profits head offshore too.
Meanwhile, consumers and businesses continue to struggle under the weight of high energy bills, of which the actual energy component is a small part. The retailers and the network operators are taking the bulk of it.
Most of our energy network is owned by foreigners, so the profits there head offshore too.
As far as the three major energy retailers go, both AGL and Origin are ASX listed, with both local and foreign investors. Energy Australia is owned by the Hong Kong listed China Light and Power Company.
Can you see now why our current account deficit is around $50 billion per year? We’re leaking money everywhere! I suppose that’s what happens when a nation is busy speculating on property prices with borrowed money.
If you want to make sure the retail component of your bill stays in the country when you upgrade your bill, check out this link.
Editor, Crisis & Opportunity
PS: Australia could be headed for a recession in 2018. But there’s a few steps you can take now to protect your family’s wealth. Find out more here.