Today’s Rum Rebellion is brought to you by easy money. It’s everywhere. Like dust in a dust storm. It gets into every nook and cranny. It settles on every surface. And it leaves societies covered in dirt.
Last night, RBA Governor Phillip Lowe gave a speech on ‘unconventional’ monetary policy. He tried to distance the RBA from it, saying that it would be unlikely he would use it in Australia.
Yet he’s cut rates three times already this year. It wasn’t long ago that the RBA expected to see a strengthening economy and interest rate rises.
If Australia doesn’t need ‘unconventional’ monetary policy, then why does Lowe mention it often?
He initially raised the prospect of Quantitative Easing (QE) in front of a House of Economics Committee in early August. As the Financial Review reported at the time:
‘Dr Lowe says the RBA is examining several policy options from overseas, extreme monetary policy measures often dubbed quantitative easing (QE).
‘Such measures include buying financial assets to drive down long-term market interest rates in bond markets, including government bond yields.
‘Dr Lowe [said] some of these measures are not necessarily appropriate for Australia and it is too early for a full evaluation of the consequences.
‘Lowe says it is “unlikely” the RBA will pursue QE, but it is “prudent” to consider.’
10-year Aussie government bonds were already yielding around 1%. Does Lowe really think the market is waiting for rates to fall further before committing to large investments and hiring workers?
The problem with Easy Money and QE…
He’s bringing QE into the national discourse for a reason. It’s because he thinks it’s coming. He just doesn’t want to add to the panic and headlines when it eventually arrives. So, the thinking goes, let’s talk about it now.
In the meantime, this unelected bureaucrat is putting pressure on the government to increase spending and stimulus via fiscal policy.
Let’s get this straight: Lowe and his ilk have cut rates for a decade. As a result, the economy has way more debt, and is far more structurally unsound. In other words, it is far more susceptible to shocks than it used to be.
And now Lowe wants the government to spend more?
How does he think that is going to do any lasting good for this country? The ONLY way the government should increase the deficit is by reducing taxes, not by increasing spending. At least that way the spending will be efficient and more productive.
One of the unintended consequences of easy money is playing out right now at Westpac Banking Corp [ASX:WBC].
CEO Brian Hartzer resigned yesterday. Chairman Lindsay Maxsted pathetically ‘brought forward his retirement’. More heads will roll in the weeks to come.
The issue here is one of compliance. No one expects banks to be able to police every single transaction. But we do expect a bank to have a robust reporting system that responds to red flags. That didn’t happen at Westpac. And it probably doesn’t happen at other banks.
My guess is that large and easy profits flowing from an oligopoly industry structure breed complacency and incompetence. Easy money makes you dumb. It makes organisations lazy.
The community response has been visceral towards Westpac. It’s not only because we find funding paedophilia repugnant. It also knows that banks and bankers are on a sweet deal. They operate in a government-mandated oligopoly, which bestows outsized profits on them.
Society is now making them pay. Unlike the regulators, it is demanding accountability. That is a good thing.
The final example of easy money comes in the form of a takeover offer for Caltex Australia Ltd [ASX:CTX] from Canadian company Alimentation Couche-Tard.
Caltex shares jumped 13.5% yesterday. Based on forecasts for 2019 net profit (the company has a December year-end) CTX now trades on a price-to-earnings ratio of 23.1x. Yet its return on equity (ROE) is only around 10%.
At a price to book multiple of 2.65, this means CTX trades on an implicit yield of just 3.77%. (10% ROE divided by 2.65.) As a business owner then, the Canadians need to squeeze some value out of CTX to make the purchase worthwhile.
I’m sure they will. But still, it just goes to show the impact of global easy money.
If this is the result — acquisitions made at high prices — then I’m not sure how it will promote actual investment and job creation. More than likely, the effect of easy money driven takeovers will result in rationalisation, cost cutting and job cuts.
Good one central banks. What’s your next idea?
PS: There’s a BIG surprise coming for the AUD in 2020. Click here to find out what it is.