You want Aussie Banks in your retirement fund far less than their advisory services

This is while things are still supposedly good for our banks. CM has written on the pickle Aussie banks find themselves for a year or so. Their relative value compared to banks such as Deutsche, Commerz or RBS is astonishing. So many global banks are worth 90% less than in 2007 while ours keep whistling Dixie. Mean reversion will hit hard and the complacency still baked into these supertankers is immense. Aussie banks could well be worth 90% less by the time this is all over. Forget the stress tests – meaningless – as they need pretty much all stars to align to be remotely accurate and markets in times of panic seldom play to script. Don’t be surprised if these banks require a taxpayer bailout in time.

With more interest rate cuts planned and inevitable QE down the line from the RBA, think of it more as a time banks must make considerable efforts to deleverage. Should banks consider a benign central bank as a virtue, they should seriously think again. People and businesses invest because they see a cycle, not because interest rates are low. Further cuts won’t make a difference.

In short, sell the Aussie banks. The impacts from the Hayne RC will only have adverse outcomes for the banks at a time they need maximum flexibility in order to be able to right the ship. Sadly, such outcomes are highly unlikely. Governments tend to be the most accurate contrarian indicators when it comes to introducing business stifling policy measures at a time, the industry can least afford it.

Maybe former President Reagan had it right when he said, “If it moves tax it. If it keeps moving regulate it. If it stops moving, subsidize it.” The government has already completed the first phase and in the midst of finishing up on the second…

Sell your Aussie banks. Headlines, like the above, will be regarded as extremely positive in the next 12 months.

Parker Hannifin order book sets worrying tone

Parker Hannifin is a fantastic barometer to measure the health of global industrials. It is a leader in pneumatics, pumps, hoses, hydraulics, drives, valves, filters, separators, refrigeration, seals etc. It’s products find their way into almost every conceivable part of the manufacturing chain. Think of it as a massive hardware store for corporations. From Caterpillar earthmovers to automation in food factories. When Parker announces orders, we get a good window on how the state of the economy is doing. The Q3 numbers released today showed:

• Orders decreased 4% for total Parker

• Orders decreased 6% in the Diversified Industrial North America businesses

• Orders decreased 4% in the Diversified Industrial International businesses

• Orders increased 2% in the Aerospace Systems Segment on a rolling 12-month average basis

Because aerospace is such a long lead time business, orders can buck trends. Having said that, orders for North America and International were soft.

Forget that Parker beat on EPS print. It’s guidance is the same. The orders are a worry. Q4 hurdles look tough.

Priorities, priorities…


Maryland (MD) – 2018

  • High school graduation rate: 87.6% (12th highest)
  • Public school spending: $13,075 per pupil (19th highest)
  • 8th grade NAEP proficiency: 34.7% (math), 37.4% (reading) (11th highest).
  • Adults with at least a bachelor’s degree: 39.3% (3rd highest)
  • Adults 25-64 with incomes at or above national median: 61.6% (2nd highest)
  • Violent crime 4.72/1000 residents (national average 4.0/1000) (9th highest)
  • Crimes per square mile 57 (national average 31.9)
  • Baltimore, MD most dangerous city (out of biggest 50) in America.
  • Opioid death rate 29.7/100,000 (3rd highest) – national average 13.3/100,000

Good to see where things are ranked among the worst, Democrats wish to put the least focus and vice versa. Rather telling. Where is the focus on healthcare and climate change? Even more telling.

Harley-Davidson is always a good economic indicator


Harley-Davidson (HDI)  is often a good benchmark economic indicator of how discretionary spending is holding up. I recall as a motorcycle sector analyst around the time the tech bubble collapse that HDI’s investor relations told me Harley customers’ loan delinquencies weren’t a worry because customers would give up the mortgage repayments before the bike loan. I understand the sentiment as a biker myself.

This is the most recent trend of HDI’s 30+ day delinquencies and loan losses. It is not a terrible level as far as the auto industry goes however it is clear that loans on these highly discretionary items is climbing back.

Harley is probably the strongest motorcycle brand out there. It has double the margins of most other motorcycle brands. Of course the market is always evolving and there is no such thing as a divine franchise long term but it has a customer base like no other – ones willing to tattoo the brand to their body. That is customer loyalty!

Naturally spending $25-50,000 on a motorcycle is a big ticket item. Economic conditions generally need to be robust for people to buy them. Naturally many choose credit to buy them so when we see the inability to repay the loan creep up we can get a true underlying picture of a stagnating economy.


The endearing positive bias of central banks


I find it amusing that central banks maintain this sense of being in control when the reality is that they increasingly aren’t as I wrote here.

President of the St Louis Federal Reserve James Bullard has changed his stripes from hawkish to dovish. While talking previously of boom time low levels of unemployment and the risk of asset bubbles, it would seem he is curbing that enthusiasm.

While talking of one more rate rise he thinks no more in 2017 and 2018. That is hardly the recipe for encouraging markets we are ‘in front’ of the curve. Moreover the Fed has backed itself into a corner. If it is forced to cut rates through any further weakness (whether blamed on Brexit) or what not, they should keep in mind the sensitivity of rates to the massive debt pile. 300% of GDP globally.


The economy: Can I crash at your place?

us jobs

The more you look the worse the data becomes. Above is US job listings. The trend does not look good. It feels as though the US election may coincide when the US tips in to recession.

With central banks going completely crazy with negative rates one questions whether the corp debt markets are just refinancings rather than new financings. Naturally the central bank wants new money to boost corporate spending, it wants banks to take on riskier lending and wants  consumers to use their money instead of suffering such punitive savings rates to get inflation in the system. But the word on inflation is simple. It ain’t happening.See below – so many countries are massively undershooting targets.


Milton Friedman said

    “There are 4 ways in which you can spend money.
  1. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.
  2. You can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.
  3. I can spend someone else’s money on myself, then I’m sure going to have a good lunch!
  4. Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get.”

Put simply the world can’t get the oomph to encourage companies or people to have confidence. The world’s central banks have rode on the confidence (aka trust) that central banks know what they are doing.

The problem for central banks now is if the world economy slips back into recession, there is almost nothing on the monetary policy front left in the arsenal.


I’ve never been this bearish. Here is why!


In late 2001 I had a bad feeling in my bones. The tech bubble had already collapsed and then Fed Chairman Alan Greenspan essentially opened the monetary floodgates to prevent the global economy from taking the necessary pain. In my head all that would turn is “this is going to end up bad”. I told my then clients in the face of constant criticism that “Alan Greenspan would go down as one of the most hated central bankers.”  Many would claim that how could I know more than the Maestro? To me it made perfect sense. The stories of recklessness, of 125% loan to value mortgages, of 1,000s of property appraisers warning the authorities of fraudulent loan brokers getting non-registered appraisers to artificially pump up the value of home prices to collect bigger fees. So people were unwittingly buying properties valued 25% higher than reality so were underwater before they moved in. The rest is history. The 2008 GFC came, Lehman collapsed and the average punter had to bail out the financial sector.

As I wrote in my previous piece about the rapidly declining velocity in money. Central banks are losing the battle around the world. I have been negative for several years now but this velocity  data sent the same chills I had had in 2001.We have manipulated currency, credit and equity markets. Governments are monetising debt but the problem is that at the same time we have inflated asset values, the economy is not turning properly. Have a look at US employment data. Non farm payrolls have declined aggressively since Feb which perhaps reflects the fact that the underlying economy is struggling. Milton Friedman often said that the economy generally slows 6-9 months after the money supply contracts in the “real economy”. Money supply can grow all it wants in the fake economy of debt monetisation.

What we are facing is simple. Central banks have been riding on the gullibility of the masses. Unfortunately economics are being played with on an unprecedented scale. They are losing the ability to fix things with money supply. With interest rates heading toward negative levels, holding cash carries positive yield. So the central banks have to keep flooding markets with more and more liquidity to stand still. When markets lose faith in central banks (this is rapidly approaching) financial markets will collapse. Of course the central banks might move to buy up markets to restore stability the reality is that will be too little too late. I think 20-30% collapses from here are totally feasible. Perhaps more. Asset markets are over inflated.I think Aussie banks will need to be bailed out. With 60% of their loan portfolio in mortgages in an overinflated property market with an economy facing a credit downgrade and a population that is over stretched. If you have a property in Australia that you don’t own outright – SELL IT. 

What do you buy in a market like this? GOLD .The most hated asset class. The most mocked,scorned and criticised hard asset. I bought mine in 2002 and have never sold it. I think it is yet to see its day. 

I hate to be the bearer of bad news. However if you thought GFC in 2008 was bad, this will be much worse because the world will finally have to take the pain they’ve avoided for the last 16 years. Party is over folks.