One of my favourite descriptions of the stock market comes from the book, Confusion de Confusiones, by Joseph de la Vega.
Written in 1688, it was the first book to describe the stock market. And it remains the most prescient. It starts with a dialogue between a philosopher and a shareholder. The philosopher asks about this ‘business’ (the stock market).
The shareholder responds…
‘I really must say that you are an ignorant person, friend Greybeard, if you know nothing about this enigmatic business which is at once the fairest and most deceitful in Europe, the noblest and most infamous in the world, the finest and most vulgar on earth. It is a quintessence of academic learning and a paragon of fraudulence; It is a touchstone for the intelligent and a tombstone for the audacious, a treasury of usefulness and a source of disaster, and finally a counterpart of Sisyphus who never rests as also Ixion who is chained to a wheel that turns perpetually.’
That, dear reader, is the stock market to a T.
It was like that in the beginning and it will continue to confound and confuse well after we’re all gone.
The recent bombshell revelations over Westpac Banking Corp [ASX:WBC] allegedly turning a blind eye to funding paedophiles speaks to the dark side of that quote. Deceitful, infamous, vulgar.
That the CEO, Brian Hartzer, is still in a job, is mind-boggling. It just goes to show you how divorced from reality these ‘paragons of fraudulence’ are.
The board is standing by Hartzer. They are appointing an independent blah blah blah to get to the bottom of it. Umm, that’s the board’s job.
[Ed note: Harzter stood down this morning.]
Joe Aston at the Financial Review is one of the few journo’s getting stuck in with venom. He writes:
‘The bank’s furtive doublespeak around what Hartzer knew – and when – is intended solely to blur the repugnant truth, as set out in AUSTRAC’s statement of claim: that “on June 3 Westpac became aware that Customer 12 was transferring money to the Philippines. On 7 June 2019 Westpac became aware of Customer 12’s conviction [for child exploitation offences]. Having identified higher [money laundering/terrorism financing] risks, Westpac was required to conduct enhanced customer due diligence. Westpac did not … From 10 June 2019 to 19 August 2019, Customer 12 continued to send 10 low value transfers to the Philippines … The transfers were consistent with child exploitation typologies. These transfers were not subject to automated monitoring for these known risks.” To say nothing of Customers 1 through 11.
‘Westpac knew it was banking a paedophile. If Hartzer didn’t, he’s running a dysfunctional organisation.’
To riff on Lord Acton’s famous saying: Money corrupts, large amounts of money corrupts absolutely.
Australia’s banking sector is a protected oligopoly. They generate world leading profitability, yet are over-regulated because of their bad behaviour. Consumers pay the price for this regulation via higher fees and charges. Banks can levy these charges because they’re an oligopoly.
By extension, the senior management and boards are oligarchs.
It’s a vicious cycle. And it’s not going to change.
Westpac is in the market’s crosshairs today, but tomorrow, it could be any of the others.
Westpac’s share price has cratered over the past week or so. Let’s be clear though, this isn’t the result of moral outrage. The market is amoral…and ‘vulgar’, to quote de la Vega. It simply doesn’t care about the ethics behind Westpac’s misdeeds.
It cares about money. Right now, there is great uncertainty about how big a fine Westpac will have to pay. It should be in the billions. These bankers and their boards need to hear, in the only language they understand, what society thinks of their fraudulent and negligent behaviour.
But let’s ignore the morality of it for now. Should you buy Westpac shares here? They’re down around 20% in less than two months.
The chart below shows the share price nearing the lows of late 2018. That in itself was the lowest level since 2012.
Aside from some brief rallies, the overall trend for Westpac and the banks in general has been down since 2015.
While a short term bounce is on the cards, I certainly wouldn’t be a buyer here. The uncertainty over penalties, reputational damage and a weak overall environment make this stock too toxic to touch.
Often, such sentiment is a contrarian buy signal. Maybe that will prove to be the case here. But in my view, it’s a low probability trade.
Ironically, for the short term at least, your money is probably much better off in one of those miserly term deposit accounts, rather than invested in the bank itself.
Sure, on the surface, Westpac looks ‘cheap’. It trades on a price-to-earnings ratio of 12.4 times expected 2020 earnings. Compare that to the Commonwealth Bank, which trades on a ridiculous 16.2 times 2020 forecast earnings. (Thank the RBA for that.)
But there’s your sign. In the age of near zero interest rates, and equities priced like bonds, the cheap blue chip is the one to beware.
So steer clear of Westpac, bargain hunters. This story has a long way to run…
PS: Why Australia’s ‘miracle’ economy is a farce. Download your free report to find out.