Do you laugh or do you cry?
We — the taxpayer — pay the RBA governor an annual salary of $1 million, and we get this…
‘In a widely anticipated speech in Sydney on Tuesday, Dr Lowe said such policies — which cover actions including negative interest rates and central bank purchases of government debt — had largely worked overseas but the Australian economy was in a much stronger position.’
Sydney Morning Herald
26 November 2019
Negative rates and printing money to finance government debt…had largely worked overseas.
We obviously inhabit a different planet.
On my planet, there’s a European powerhouse called Germany.
That nation’s central bank — Bundesbank — published its ‘Financial Stability Review 2019’ on 19 November 2019.
The report begins with…
‘Under the Financial Stability Act (Finanzstabilitätsgesetz), the Bundesbank has extensive responsibility for monitoring the stability of the German financial system. It has the statutory mandate to identify and assess risks to financial stability.’
And the German’s take this responsibility seriously.
Here’s a few extracts from the report…
‘Global economic growth has slowed considerably and risks to the economy are predominantly tilted to the downside.’
Ain’t that the truth!
And this considerable slowdown is after a decade of negative rates and money printing.
Yet, somehow, our RBA thinks things have ‘largely worked’ out. Love to hear what they’d classify as a ‘failure’.
Anyway, our attention is on a central bank that doesn’t have its head buried in another part of its anatomy.
The Bundesbank is repeating what we’ve been banging on about for some time now (the whole sentence is in emphasis because it’s important that people realise this)…
‘Despite much weaker growth in corporate profits, valuations in the global bond markets and, in some cases, the equity markets are still high, historically speaking.’
Profits weak. Share prices strong. Anyone else see something amiss here?
Certainly not our RBA…things are largely working.
Ah, but working towards what? A massive crash perhaps?
And what’s been pushing valuations to these historical highs (emphasis is mine)?
‘A key driver of these valuations is the expectation that risk-free interest rates will remain at low levels over the coming years. Low interest rates, favourable financial conditions and a high risk appetite among investors pose the threat of risks being systematically underestimated and vulnerabilities continuing to build up.’
On the planet the RBA inhabits, I can only assume all dogs have been neutered.
Because on ours, the distortions resulting from central bank actions stick out like dog’s b*lls.
The Bundesbank has made the perfect case for Hyman Minsky’s ‘stability leads to instability’ theory.
The more convinced people are of the stability of the system, the greater they load the system up with risk. Which leads to the instability of the system and its ultimate correction.
During the prolonged phase of credit expansion (blue line), GDP growth (red line) moves higher.
Everyone believes the economy is strong, so let’s load it up with even more (high risk) debt.
Then comes the Minsky moment, that point where you run out of bigger fools.
This graph is a perfect illustration of how the RBA has ‘managed’ our economy.
Encourage more debt. Pump up the GDP number. And then, encourage more debt.
The RBA, Australian Economy and Our False Sense of Security
The greatest regret our nation should have is that we did not have a recession much sooner.
Aussies have been lulled into a false sense of security.
The longer a system appears to be stable, the greater its instability.
With one of the highest debt levels in the world, Australian households have never been more vulnerable.
We gone too far to avoid our destiny with the Minsky moment. It’s coming and when it does, it won’t be pretty.
The ‘stability leading to instability’ effect is a time-honoured psychological pattern…dating back to the Tulip mania in the 1630s.
And, this may come as a surprise to you, but even on the planet the RBA inhabits, they know about Minsky’s theory.
The following is an extract from a speech given by the RBA’s Head of Financial Stability Department on 15 April 2009.
‘Perhaps the most basic underlying driver of the crisis was the inherent cycle of human psychology around risk perceptions. When times are good, perceptions of risk diminish. People start to convince themselves that the good times will go on forever. Then, when the cycle turns, risk aversion increases again, often far beyond normal levels, let alone those seen during the boom.’
The title of the speech?
‘The Global Financial Crisis: Causes, Consequences and Countermeasures’.
The RBA doesn’t even have the defence of ignorance to blame for its incompetence.
Take a quick look at the narrative accompanying the blue line…normal borrowing followed by speculative borrowing followed by Ponzi borrowing.
Now look at what the Bundesbank has identified as a major risk (emphasis is mine):
‘Corporate debt in a number of countries has risen significantly over the past few years, for instance. The United States, in particular, has seen large-scale lending to enterprises with low credit quality. These leveraged loans tend to be associated with higher default risk. They are often securitised and then sold on to investors around the world. A number of systemically important German banks have significant exposures to leveraged loans.’
There are times when two words put together should strike fear into your heart.
‘Shorten wins’ comes to mind.
And another is…‘leveraged loans’.
As explained by FXStreet (emphasis is mine):
‘Regarding credit standards, leveraged loans are being granted to borrowers with increasing leverage (with a debt-to-EBITDA that is higher than the levels seen in 2007).
And if this powder keg being greater than 2007 doesn’t scare you, then perhaps this will (emphasis is mine).
‘Furthermore, traditional covenants protecting investors from unexpected loss have been relaxed in recent years. In particular, covenant-lite transactions have reached a historic high (about 80% of new issuances). These factors (lower protection and lower creditworthiness of borrowers) could undermine recovery rates in a recession, causing greater losses than in previous crises.
‘It is obvious that this deterioration of underwriting standards is unprecedented and the reaction of leveraged loan markets under a more stressed economic scenario is uncertain.’
These toxic investments — with the potential for greater losses than previous crises — are the ones that German banks have significant exposure to.
And, even before these leverage loans start impairing the balance sheets of German banks, Moody’s is warning of ‘profitability weakness’.
This is the headline from the 21 November 2019 press release…
The outlook has gone from stable to negative. What was that again about stability leading to instability?
According to the Moody’s report…
‘Banks’ weak profitability will decline further as net interest income falls,’ said Bernhard Held, VP-Senior Credit Officer at Moody’s.’
Negative rates and money printing, largely working?
I think not.
Let’s sum up what central bank actions have achieved.
Weak German banks are getting weaker. German banks have exposed their balance sheets to toxic debt instruments in an effort to generate profits. Profits are down, but share prices have been goosed up. Risks to the economy are tilted to the downside.
And for good measure we get this warning on very low interest rates from the European Central Bank (ECB) Financial Stability Review November 2019 (emphasis is mine):
‘…very low interest rates, coupled with the large number of investors which have gradually increased the duration of their fixed income portfolios, could exacerbate potential losses if an abrupt repricing were to materialize.’
Central banks have largely worked to produce a system that’s only a hiccup away from another Great Depression.
The RBA governor’s seriously flawed assessment is based on the upside of the cycle…when all you see is the paper and not the cracks underneath. We are yet to go through the downside.
In reality, the system is extremely unstable and highly vulnerable. This will not end well.
The good news is that if you live in the world the RBA inhabits, then you can relax…there’s nothing to worry about. Everything is tickety-boo. They have everything under control.
However, if you happen to live in the real world, then you should be really bloody angry about the deception and trickery from the RBA.
The RBA is an utter disgrace. This will become blindingly obvious to all and sundry when the next recession hits.
For all our sakes, the sooner the RBA is legislated out of existence, the better off we’ll all be.
Alas, that will only happen on another planet.
Regards from a really bloody angry
PS: Why Australia’s ‘miracle’ economy is a farce. Download your free report to find out.