One of the upshots of the farce happening in the US is that the global economy is destined to take an even bigger shift across the Pacific towards Asia. The urbanization of Asian nations and growing wealth of individuals will compensate for lower demand out of North America. Remember, they have been saving while the West has been spending.
Australia is perfectly placed to benefit from this. Importantly, Australia actually produces things that industry wants. Correction, that industry needs. Raw materials. Commodity prices may not stay at elevated prices forever. In fact they may fall lower than where they are now.
The reality remains that Asian economies continue to grow. And their demand for raw materials is growing with it.
That’s fine for exports, but what about the Australian banking system? Thanks to the “4 Pillars” banking policy and the lack of competition, Australia is likely to miss out on the banking blow-ups that we have witnessed in the US and the UK.
Because of this the local banks have not had to get too “smart” with how they finance their loan books. For the most part they can rely on deposits to fund their lending. Our two investment banks, Macquarie and Babcock & Brown have not been so lucky.
Despite this, they do have some exposure to the complex derivatives products that have caused such trouble in the northern hemisphere, but not to the same degree.
The main risk for the Australian banking system is that it develops overconfidence. And that they start to puff out their chests congratulating themselves on escaping the worst effects of the credit bubble.
Perhaps the bravado has started already. Before the bodies of Freddie & Fannie are even cold there has been talk about setting up a government funded “Aussie Mac.”
A company called Rismark has proposed setting up a listed property derivative which would trade on the ASX. In a typical example of the private sector taking the profits and the government taking the losses, Rismark has proposed that Aussie Mac would only be a back-up in a liquidity crisis.
Just as mortgage backed securities were originally designed to help US Savings & Loans companies to hedge their risk exposure, that is exactly how the ASX property derivatives would be marketed here.
However, we have little doubt that before long the sales guys at the investment banks would be out marketing the products to as many funds and hedge funds as they can. Thanks to the past few weeks we’ve seen the consequences of nearly thirty years of the same thing in the US.
Given the choice between buying resources and energy stocks at a discount or buying banking shares at a discount, we will take the resources and energy stocks every time.
We’re happy to stay clear of banking shares until at least after the next reporting season. If that means missing out on 20% upside, it’s a chance we’re prepared to take.
