So, two of the big Aussie banks have reported big profits.

Not surprisingly, the share price for each stock received a nice kick-along.  Commonwealth Bank of Australia [ASX: CBA] has added over $3 since the profit announcement, helping push the share price close to the April 2010 high:

Source: CMC Markets Stockbroking

A half-year net profit of $3 billion will tend to do that to a stock.

The other result was from our old pals at National Australia Bank [ASX: NAB].  It’s up more than a buck over the same period and looks set to target in on its April 2010 high of nearly $29:

Source: CMC Markets Stockbroking

NAB reported first quarter cash earnings of $1.3 billion.

As you’d expect there has been lots of chitter-chatter about the strength of the Aussie banks.  And how it’s important to have a strong banking sector.

The funny thing is, it’s not actually true.

Well, it’s not true for you and me anyway.

The only people that a strong banking sector is good for is… erm… those at the banks.

You see, the mainstream economists and commentators have gotten things back-to-front – again.

They falsely believe an economy can’t go on without a strong banking system.

The reality is, if the banks disappeared tomorrow something else would replace them.  Sure, it wouldn’t come without pain, especially for depositors, but things would move on… bottom line, we’d all get over it.

If there were no banks, capitalists would spot the opportunity to store money for savers and lend money to borrowers.  Other investors would lend directly.  Either way, the market would create a system where savers and borrowers could interact… just like any other market.

In reality, if you strip away the fraudulent money creation by the banks, that’s what banks are for: to store your savings until you need them.  Like how you might use Storage King to store your furniture until you need it.

The difference is the banks can lend out your savings to borrowers and pay you a fee in return.

Trouble is, the banks get greedy and lend out more than they should.  Praying that savers don’t want to withdrawal all their savings at the same time.

But that aside, think what would happen if the rest of the economy collapsed and only the banks survived… oh boy, then there would be trouble.

There would be no jobs, no production and no services.  And any savings that had been preserved in the banks wouldn’t be much good if there was nothing to buy or sell.

Look, I know that’s an extreme scenario, and it’s not likely to happen.  I’m just trying to make a point.

Our banking pals are given the kind of privileges no other business is given.  That is the ability to create money and assets from thin air.

But because the banks and central banks have done such a good job of leveraging up global economies thanks to increasing the money supply, banks have put themselves right at the centre of the economy.

They’ve made themselves indispensible in the minds of the mainstream… and they know it.

The more assets and money created, the greater the power the banks have over the economy.

But they don’t just leave it at that.  I mean, anyone can borrow and lend money.  What’s most important for the banks is to leverage the market up as quickly and as broadly as possible.

They need to create multiple layers, creating complex and unfathomable financial products.  So that it turns into a row of dominoes.  If one part falls, the whole darn lot starts to collapse.

Hence the banks get the kind of political favours few others can.  The banks simply need to warn politicians and central bankers about the knock-on effects of letting a bank collapse and hey presto, the bailout arrives.

And that’s just the way the banks like it.

In 2008 cuddly old-timer, billionaire and banking insider Warren Buffett decided to back the odds.  He bet big the US government would throw trillions of dollars at America’s banks.

After taking a $5 billion punt on Goldman Sachs [NYSE: GS], he then did his darnedest to ensure the government and Federal Reserve wouldn’t back down.

As he said in a recent interview with the Financial Crisis Inquiry Commission (FCIC), regarding his $5 billion punt on Goldman Sachs in 2008:

“It was a bet essentially on the fact that the government would not really shirk its responsibility at a time like that to leverage up at a time when the rest of the world was trying to deleverage.  I made the fundamental decision that we had the right people, in Bernanke and Paulson, in there with a president that would back them.”

By “the right people”, Buffett means insiders.  Those with vested interests in keeping the banks afloat.  Even if it means robbing the taxpayer of billions and trillions of dollars.

An act of vandalism that continues today with the inflationary price spiral of commodities and prices.  Mostly created by the creation of new money by the central banks and retail banks.

The problem with having banks at the centre of the economy is that it’s forgotten what really makes an economy productive.

Over the past couple of years you’ve probably heard mainstream drones talk about credit being the lifeblood of an economy.  That’s wrong too.

What makes an economy productive is capital and ideas.  That’s the lifeblood of an economy.  Unfortunately, few realise this.

They talk about banks needing to lend to get the economy moving.  So we were amused by an article in the Financial Times yesterday.  According to the article:

“The accord effectively saw Mr Osborne give a green light to banks to pay multibillion-pound bonuses in exchange for a promise to increase lending to small companies by 15 per cent from £66bn to £76bn.”

You’d think the words “moral” and “hazard” would be on everyone’s lips right now.

But not amongst the short-sighted political class.  Again they show their ignorance, stupidity or connivance.

As far as the UK Conservative/Liberal Democrat government is concerned, to cure the economy they need to let the banking exec’s know that they’ll get big fat bonuses provided they lend more money.

Excuse us for thinking it was the desire to lock away big fat bonuses by lending to anything that moved that was partly responsible for the current problems.

And unfortunately for the UK taxpayer, as part owner of nationalised banks, the UK government will act as a backstop when it all goes pear-shaped again.

If only the drones would realise the key to bolstering an economy is to get government out of business.  The key most certainly isn’t to have government teaming up with the banks to screw them over.

Perhaps if the UK government hadn’t increased taxes – VAT, the equivalent of the GST, now stands at 20% – small businesses wouldn’t need to borrow.

One-fifth of almost every dollar spent by UK consumers flows straight through to the government.  That means one-fifth of the consumer dollars can’t be spent elsewhere, perhaps at a small business.

The fact is, if governments didn’t take so much from consumers and businesses in the first place, there would be less need for businesses and consumers to borrow.

But then, in a world of few politicians and less reliance on banks, what need would there be for politicians and bankers?

And there you have the problem.

Regards,

Kris Sayce
for Money Morning Australia

More annoying banter from your editor to the ASX:

“So when can we expect the ASX to make an announcement on this?

“I’m sorry, but this is a no-brainer. As I say, the ASX’s own website states: Timely disclosure must be made of information which may affect security values or influence investment decisions, and information in which security holders, investors and ASX have a legitimate interest.

“It’s no excuse to say that there wasn’t any price action therefore the ASX can’t investigate. You can’t know if the news will impact the price until after the news has been released. Under ASX rules the news must be released under the reasonable person test. If a reasonable person expects that it could impact the share price then the news must be released. There’s little doubt that if this information had been made public at the time it would have impacted the price and therefore it should have been made public. Or is the ASX’s view that it’s OK to keep some information secret because it may adversely impact the share price?

“The ASX is doing itself a major disservice by not immediately asking NAB and Westpac to explain their actions. More importantly, the ASX is doing investors a major disservice. We can only wonder what other information the ASX is conspiring to keep secret from investors!”

It’s no wonder your editor receives so few invitations to dinner parties. Considering how annoying we can be!

And thanks to Money Morning reader Dean for bringing our attention to this story, “Law Firm to Launch Class Action Against Aust Miner Oz Minerals”

According to the news report:

“Slater & Gordon practice group leader Van Moulis alleged OZ Minerals failed to release important financial information between February 29, 2008 and December 1.

“‘The market relies on being fully informed and with OZ Minerals, we believe, shareholders were sadly let down,’ Mr Moulis claimed in a statement

“Investors have alleged OZ Minerals breached its continuous disclosure obligations and understated its liabilities by about A$300 million.”

It makes you wonder if short-sellers in Australia’s banks could launch a class action against NAB and Westpac for non-disclosure of the Fed secret loans. I mean, there’s little doubt that if investors had been aware of these loans it would have had a further negative effect on the share price.

Short-sellers could have made a killing if NAB and Westpac had fully disclosed the secret loans.

In fact, non-disclosure of the loans could have resulted in many short-sellers losing a lot of money as bank share prices rallied. As investors were led to believe Australia’s banks were strong and secure.

As I’ve said before, I’m no legal eagle, but we’re sure investor protection goes both ways. If OZ Minerals can be sued for non-disclosure of negative information, why shouldn’t NAB and Westpac?

In both cases investors have been harmed. We’re struggling to see the difference. Perhaps if you’re a lawyer you could drop us a line to let us know.

On that subject we notice Reserve Bank of Australia (RBA) assistant governor Guy Debelle has made a half-baked attempt to justify the bailouts.

As you’d expect, he doesn’t mention NAB and Westpac specifically. In a speech to the 23rd Australasian Finance and Banking Conference, Mr. Debelle said:

“The RBA participated in the swap line [with the US Federal Reserve] to help distribute US dollars into this time zone… It did not reflect any issue with the Australian banking system’s own need for US dollars. The funds provided under the swap line were cheaper than the extremely wide market price at the time. As a result, Australian based banks availed themselves of this and in a number of cases on-lent the funds to banks in other jurisdictions.”

What utter nonsense.

You’d think an RBA assistant governor would understand how these things work.

On any given day a bank may need to roll over millions or billions of dollars’ worth of debt. If – as was the case in 2008 and 2009 – credit markets seize up, the bank still has to repay the loan. In normal circumstances it would simply take out a new loan to pay for it. But at that time it was much harder.

Mr. Debelle’s own chart proves that:

In a nutshell, it shows that debt became more expensive. It became more expensive for two reasons – first was the risk premium demanded by investors. And second was the drop in the supply of debt buyers.

It’s for these two reasons why the Aussie banks had to crawl to the US Federal Reserve and the RBA for emergency funding.

This whole idea that the Aussie banks were sitting back and licking their lips at getting hold of some cheap funding in order to earn a few dollars profit is just ridiculous. But, it’s the kind of excuse that the mainstream press will fall for.

Just remember what thin capital margins the banks run on. Failure to roll-over even a small amount of funding means that the banks’ capital levels slump.

The article of page 45 of today’s Australian Financial Review (AFR) shows you that. The margins are so tight that according to the AFR:

“If ANZ was forced to lift its risk weighting [on some corporate debt] from 65 per cent to 100 per cent, it would need to find enough capital to support an additional $50 billion of loans.”

In other words, according to analysis from Axiome Equities, ANZ is claiming certain assets on its books are less risky than they really are… just so the bank can hold less capital on its books.

Incidentally, we like the closing paragraph at the end of the article, “A spokesman for APRA declined to comment citing provisions under the APRA Act.”

That would be the Section 56 secrecy provisions of course. Since when was secrecy an investor’s best friend? We’ll ask ASX that question the next time we pester them…

Anyway, yesterday it was Commonwealth Bank of Australia’s [ASX: CBA] turn to have a [ahem!] so-called computer glitch.

Don’t panic, the bank said. Everything is under control. Today’s AFR quotes from the CBA media release, “At most, up to 5 per cent of CBA accounts were impacted.”

Well that’s alright then.

Computer glitch indeed. The fact is, it’s another sign of the systemic failure of the modern banking system. And even scarier is the fact that so few people are aware of it. In no small part thanks to the incompetent mainstream press.

As you know, they’ve been almost deathly silent on the National Australian Bank [ASX: NAB] and Westpac [ASX: WBC] Federal Reserve Bailouts. Aside from a half-baked article in the Fairfax papers – although bizarrely, not in the Australian Financial Review which didn’t cover it at all – and an even more bizarre attack on your editor by the same organisation’s CBD column.

Why the CBD column didn’t report the actual bailout instead of ridiculing your editor is something only it knows.

So ignorant (and we mean that kindly, not meanly) are most people about the secret loans that we noticed this comment by MrBungle in the comments section of an article in yesterday’s The Age about the Commonwealth Bank “glitch”:

“‘Are people aware that during the global financial crisis that two of our major banks borrowed $5b from the US Federal Reserve and the RBA borrowed $53b from the US Federal Reserve?’

“Ok, now that I’ve stopped laughing (after about 10 minutes) I’ll ask you this George…

Point me to some evidence of this mate, otherwise you’re obviously not wearing your tin-foil hat tightly enough…

“That is, they’ve got at you ! ;-D Seriously tho, a link to evidence of this would be appreciated…”

MrBungle – if that’s his real name – was having a pop at another reader who had mentioned the secret loans.

It gives you some insight into how uninformed the majority of the population is. Most people have been trained to believe everything they read in the mainstream press. And they’ve been trained to believe that the current banking system is normal.

That it’s the result of progress in banking. And that today’s system is obviously so much better than how things used to be because, well, it’s modern and we know better than all those clowns who used to carry gold and silver around in their pockets.

But take a look at the other news stories to fill page 45 of today’s AFR:

“ANZ slated for ‘inadequate’ capital holdings”

“CommBank abused franking credits, says ATO”

“Mortgages not retired”

The last story states, “Almost half of Australians won’t pay off their mortgages before they retire…”

So much for the dream of retiring at fifty and then playing golf non-stop for forty years.

And then look at this story from The Age:

“Property chiefs warn on units glut”

Don’t tell me there’s an oversupply of housing already. What happened to the “chronic housing shortage” the property spruikers have been banging on about for years?

I tell you what happened to it… it never existed.

It was just a beat-up by the vested interests. It was one of the many fraudulent excuses they used to cajole young and old into paying ever greater amounts for houses.

But as we’ve been writing for the past two years, the numbers never really stacked up.

Take these numbers as a perfect example of the joke that is the so-called housing shortage. According to the Australian Bureau of Statistics (ABS) in 1998 there were 7,015,200 occupied private dwellings.

At the same time, according to the World Bank, Australia had a population of 18,700,000.

That gives you an average of 2.66 people per private occupied dwelling.

Fast forward a few years to 2010, the ABS reckons there are 8,395,000 occupied private dwellings. And the ABS population clock claims there are 22,557,247 people living in Australia.

Now, remember that Australia has a “chronic housing shortage.” That there has been a massive underbuild of housing, especially over the past five years. All that said, what’s the average number of people per private occupied dwelling?

It’s, erm… 2.68.

We’re no statistician, but we’re pretty sure that at two decimal points your statistical chaps would call that a rounding error. The fact is, the number of people per dwelling hasn’t changed in twelve years.

Where’s the shortage of housing?

Yet somehow, despite that startling revelation, the mainstream press has been hoodwinked into believing the property spruiking spin – that Australia has a chronic housing shortage. When in reality it has nothing of the sort.

In fact, if we believe the property developers quoted in The Age, we’ve got the opposite of a shortage. We’ve got a glut.

But look, we’ll take The Age article with a grain of salt. It’s based on what two property developers are saying. They are clearly not impartial observers and likely have some reason for pointing out the lack of a shortage.

Besides, you don’t need to listen to them anyway. The numbers speak for themselves.

More shocking is the fact that more people are approaching retirement and old age still mired in debt.

And other numbers from the ABS show you what a difference it can make to an economy. And why it’s no surprise retailers are feeling the pinch. According to the ABS, in 2008 the mean weekly housing costs for a person without a mortgage was just $33.

That’s right, $33.

But for a person with a mortgage, the mean weekly housing costs were $384.

If more people are stitched up with a mortgage for longer, there’s no doubt that it means more money spent on servicing mortgages, and less money going towards savings or consumption.

And not only that, but thanks to the suckering in of first home buyers in recent years, they’ll have even less disposable income than if they’d remained in a rental property.

Occupiers of rental housing only have a mean weekly housing cost of $267 in 2008. That’s significantly less than the person with a mortgage.

As we see it, the poor sales and profits figures from retailers in recent months are set to continue into 2011. And the idea that Australia’s miracle economy will continue to prosper is likely to flounder in a sea of massive personal debt.

Oh, and as for the idea that Australia’s savings rate has increased. Take that with a grain of salt too… the ABS certainly does. The mainstream has lauded the 10.1% national savings rate as being a sign of lower debt.

This is what the ABS has to say about it’s own statistic:

“Household saving in not measured directly. It is calculated as a residual item by deducting Household final consumption expenditure from Household net disposable income. As the difference between the two aggregates is relatively small, caution should be exercised in interpreting the Household saving ratio in recent years, because major components of household income and expenditure may be subject to significant revisions.”

We’re wary about ABS data at the best of times. But when they tell us to be cautious about it themselves then that’s exactly what we do.

Cheers.

Kris Sayce
For Money Morning Australia

Is it ANZ Bank’s [ASX: ANZ] turn to “do a NAB”?

According to the grapevine, both ANZ online banking and the ANZ owned E*Trade broking platform have both been offline this morning.

Is it another case of another Aussie bank suffering liquidity problems? Or is it just another glitch in the system.

The Money Morning mailbag has continued to receive literally one’s of emails (four at the last count) from readers in the IT industry saying they aren’t surprised by the so-called computer glitch at the NAB.

The best of the bunch was this one posted to the Money Morning website by reader ‘N’:

“A few years ago I project managed the IT transition from one building to another, for one of the very well known 2nd tier banks. The whole thing was in shambles. Example – under a desk we found a very old PC (90′s) which, it turned out, was also the host of an ancient application that enabled visa payments for a particular (large) product class. The application was unsupported and only ran on one of the 90′s Windows versions. My initial advice from the propellerheads was just… don’t… touch… it.

“Investigations kicked off (this was about 1% of total project scope) and no replacement system could be identified. Hence we had to move the damn thing to the new building, and even more frightening TURN IT OFF in order to do so. There was less than 50% chance that the damn thing would start up again. We managed to get it across and it booted back up. If it hadn’t worked, well…

“I can imagine that it still sitting under a desk somewhere, and by now the turnover in the IT department probably guarantees that no-one knows about it anymore.

“So in summary – No, there is no limit to the risk incurred by utterly sub-standard IT infrastructure in our banks. I could give you a dozen more examples.”

The words “secure” and “stable” hardly spring to mind when you read stuff like that. And these are the institutions responsible for taking care of your hard-earned wonga.

Another reader, ‘k’ wrote:

“Banks are required (as are many other financial institutions) to have off site systems, however oftn the capacity of thise systems is far far below what the everyday system is- there appears to be an assumtion that should it be needed everything can operate at a slower pace.

“The more legacy systems are lying around the place, entangled into the new ones, the better the chance that something like this will happen- a variation on the Y2k threat- but without the attention and push to fix.

“That said- it shouldn’t have taken 6 days- I had a brief conversation with an ex Centrelink person- they had similar servers/server issues and it took about a day to rectify. 6 days does indicate something else was happening, particularly when the debits continued to flow- so all of the corrupt code was only on the credit side?

“If I were inclined to the criminal mode and had access to those servers and historical data- I would be going after any big unattended accounts and getting some odd debits in- it could be yers before anyone thinks to object, and easy money.”

There you go, one day versus six days. And we’re sure, considering it was the public sector, even that one-day job would have been knocked off in just a couple of hours by an IT guy in the non-bank private sector.

Anyway, there’s more than a fishy smell to the NAB debacle. We can smell a rat too.

But just as the Commonwealth Bank [ASX: CBA] ignored us when we were the first to reveal their lies about house price to income ratios (ahead of the sleeping mainstream press), we’re sure NAB will continue on with their glitch excuse.

But who cares about all that. The market is roaring ahead today. Everything is fine again with the world.

The US Federal Reserve’s Beige Book revealed that ten of the twelve Federal Reserve districts had seen economic growth, the Europeans have vowed to do “whatever it takes” to try and re-float their economies, and the US Federal Reserve has said it will help out the Europeans if they need it…

Quite how it’s going to do that, we’re not sure. Oh, that’s right, it’ll just create a bunch of numbers on the Fed supercomputer and email that to the European Central Bank.

That seems to be how wealth and economic growth is created these days!

But as we write, the Aussie market is up about 1.5% on yesterday’s close.

Everything is up… except gold. Must be time to think about buying a bit more. “Buy gold on the dips,” our colleague and Daily Reckoning veteran Bill Bonner tells his readers.

We like that advice. In fact, we’ve liked that advice for the past six years when we started out as the first editor of the Australian version of the Daily Reckoning.

Of course, we always regret not having bought more when the price is high. But funnily enough, when the price falls we never regret having bought it. That’s something we can’t say for other investments.

But yesterday’s market action was interesting. Interesting because of the sense of déjà vu.

Here’s the chart below:

Source: CMC Markets Stockbroking

On Tuesday we wrote about the strong rally as the market reversed from a twenty point loss (red circle) to finish with a twenty point gain. The rally from the top to bottom was over 1%.

Yesterday, an almost identical thing happened. The only difference was that the lift off happened later in the day, at about 2.30pm (the other red circle).

After reaching the low point of the day – at the same level as Tuesday’s low – the market hot-footed it to almost close in the black. This morning the market gapped higher and is trading higher than Tuesday’s high.

If nothing else, those two bounces off the bottom show you how important key technical levels are to the market.

Traders would have had that low point in their sights. When it reached that level it was a case of whether the bulls could beat the bears.

So once the market failed to break through, bosh, the market took off as traders and institutions just kept buying in to the rally. The only thing that stopped the market moving even higher was the end of the trading day.

Obviously this morning’s rally shows you there was some unfinished business. Add in the excitement of supposedly positive economic news from overseas and you get the kind of rapid-fire rally you’re seeing now.

The problem with this kind of market move is that it can drag reluctant buyers into the market. Buying into stocks on the fear of missing out on bigger gains.

That’s what can make stock markets so dangerous.

It’s fine if you’re a day trader, a short-term trader, or a punter. But what about if you’re an investor?

On a day like today, when you see the main Aussie index pile on seventy points, it can be hard to resist the urge to dive in.

If you did that at point 1 on the chart below in 2006 then you would have done quite nicely:

Source: CMC Markets Stockbroking

But if you’d jumped in at point 2 in late 2007, well, the picture wouldn’t have been quite so pretty.

And remember I’m talking about being an investor here. The sort of investor who typically buys and holds for a while.

The reason I mention this is that I know how hard it is to keep your emotions in check when you see the market take off.

But it’s important to remember that we’ve seen this kind of big move before. In fact, it was as recent as the first week of November that the main index gained a similar amount… only for it to drop by 200 points over the course of the month.

To my mind, whatever the government statistics claim, the fundamentals for a strong market just aren’t there. Everything is being propped up by government and central bank manipulation.

Take that away and… you know the rest. And ultimately it must be taken away. The longer the support remains the harder and more painful the consequences.

Because of that, you need to be careful about what you buy. I wrote to Australian Small-Cap Investigator subscribers last night telling them that there are plenty of good stocks on the market but that “doesn’t mean to say you should pay any old price for them.”

The same goes for blue-chip stocks. I’m looking at my watchlist of about 35 blue-chip stocks this morning and all but two of them are up.

But I’m not a blue-chips kind of guy. I prefer the specky tiddlers. But if you are into blue-chips what do you do when you see a list like this:

Source: CMC Markets Stockbroking

I mean, how do you know which is the best value? Brambles Ltd [ASX: BXB] is up 2.34% as I write, but does it have the potential to go higher? And if so, by how much?

Or maybe you’re better off getting into CSR Ltd [ASX: CSR] which is only up 0.6%.

Or perhaps you should go with the strongest gainer and plump for BlueScope Steel [ASX: BSL], after all it is up over 3%, what’s to say it can’t go even higher?

To be frank, I can’t give you a clear answer on that. Because they aren’t the kind of stocks I follow. I’m more of an opportunist and a speculator. But that’s no good if you’re not that kind of investor.

But as a speculator or a punter I would be tempted to say that something like AMP Ltd [ASX: AMP] might be worth having a flutter on:

Source: CMC Markets Stockbroking

But only for a punt. For no other reason than it’s down about 30% over the past year.

But again, that’s not a good enough reason if you’re a medium to long term investor. If that’s you, rather than taking advice from a punter like me, you’re better off taking advice from a value investor.

Someone who doesn’t worry too much about charts. Someone like my old pal Greg Canavan at Sound Money Sound Investments.

When markets are trading all over the place, and when every stock is going up or every stock is going down, you want to know which stocks are being unfairly sold off and which stocks are being unreasonably bought higher.

That can be tough to figure out. You’ve got to put in a lot of ground work and read a lot of company reports to find out whether a stock truly is trading below its intrinsic value. It’s not usually something you can easily pick up just by looking at a price chart.

The fact is, the market right now is one of the toughest I’ve ever seen as a stock picker. It’s easy to get carried along with the crowd. And while that can give you some easy gains, it can also cause you to suffer some pretty painful losses if you’ve bought in to the wrong stock.

So, considering how tough it is right now, I’d suggest you give yourself a free-kick by grabbing hold of Greg’s Sound Investments Series.

The series includes what I believe is the probably the most important report you’ll read over this Christmas holiday period – The Value Investors Secret to Identifying Quality Underpriced Stocks.

If you’re a medium to long term investor and you’re not sure whether to buy into this rally, then my advice is don’t… at least not before you’ve read Greg’s special report.

The stock market rises and falls all the time. It’s important not to jump in when you may be better off waiting.

Cheers.

Kris Sayce
For Money Morning Australia

Other mornings our story cup is overflowing with, erm, story coffee…

Anyway, today is one of those “Other” mornings.

We’ve got so much to write we’re not sure whether to just fight one of them individually, or attack them all kung-fu style.

So, we might do a bit of both. First up we noticed a couple of funny things in the Commonwealth Bank’s results yesterday.

The most obvious was that Ralph Norris is clearly a graduate of the same university as ANZ Bank’s Mike Smith. They both hail from the Pinocchio University.

Because, like Smith, Norris was able to tell a whacking great tissue of lies yesterday by claiming:

“[Australian] Banks were well managed, with more conservative business models which discouraged high risk lending and widespread exposure to toxic subprime assets. The Australian government introduced guarantees to support the financial system, but it should be noted that not one dollar of taxpayer money has gone to our banks. In fact, the Australian taxpayer will benefit to the tune of $5.5 billion from the wholesale guarantee over its life.”

That’s funny, because we thought the government had handed out $21,000 to first homebuyers over the last year or so.

Could it really be true that not one single dollar of taxpayers’ money ended up with the banks? It doesn’t seem likely, not when you consider how reliant people are on using bank accounts these days.

You see, in order for the banks not to have received “one dollar” from taxpayers, that would involve the vendors to all property sales specifically choosing to not deposit $21,000 of the sales proceeds into their bank account.

All vendors since October 2008 who have sold homes to first homebuyers must be still holding the $21,000 in cash. Maybe they’re keeping it under the mattress, or they’ve dug a hole in the backyard to put it in.

I’m serious. For Norris’s statement to be true, then over $4 billion in bank notes must been hoarded by vendors, refusing to save, invest or spend it.

Because that’s the only way that Australia’s banks would have avoided receiving “one dollar” of taxpayer money.

And we know that just isn’t possible.

Of course most of the mainstream press just laps whatever a bank CEO says without question. Except for Eric Johnston at The Age who reported:

“Mr Norris is correct to point out that unlike the US or across Europe, no taxpayer dollars were spent bailing out an Australian bank… However, Australia’s majors had a substantial boost from the combined efforts of the government providing a blanket guarantee of the nation’s deposits, as well as a backstop funding program to ensure continued access to crucial wholesale funding markets – albeit for a fee.”

But we’ll stop short of tipping our cap to Johnston, because like most in the mainstream he can’t help himself with the claim that “Australian banks were run with substantially lower risk settings than some of their global counterparts.”

Yeah right!

If that’s the case, why the need for the guarantees and the first home buyers bribe? It just doesn’t add up.

Australia’s banks are so low risk, that apparently, according to The Age, “The State government-owned developer that has responsibility for providing affordable housing is selling house and land packages in East Keilor for close to $1 million.”

It’s true, you can see the properties for yourself here.

But what about this idea that the taxpayer will ‘profit’ from the bail outs due to the fee charged by the government to guarantee the bank’s debt?

Of course, that’s not true either.

The obvious point is that the banks just pass the higher funding costs through to the customer by either charging higher interest rates to borrowers or offering lower interest rates to savers.

The bank itself doesn’t pay for it. Ultimately it’s a fee borne by the public. And because credit and bank accounts are so ingrained into the daily lives of individuals, those individuals are unable to avoid those higher costs.

I mean, just say the government provided a guarantee to bakers of white bread which cost the bakers 10 cents per loaf. The bakery would try to pass this cost onto the consumer.

However, the consumer could easily avoid this impost by refusing to buy white bread and instead buy multigrain bread. This effect would mean that white bread bakers would be less inclined to pass on the increased cost for fear of losing customers to bakers who make multigrain.

Of course, even then it wouldn’t necessarily be good news for the consumer, as due to a higher demand for multigrain, those bakers could raise their prices in response to the higher demand until white and multigrain bread are a similar price.

The upshot is, that in whatever form it’s made, government interference in the market is always to the detriment of the individual.

The banking system is completely different. All the banks have used the government wholesale guarantee to some degree, therefore not one bank can advertise that it hasn’t and therefore claim it has lower fees.

Therefore the banks can uniformly raise their prices so that the consumer never gains the benefit of even a temporary drop in price.

In addition, it’s much harder to change banks than it is to change the type of bread you eat. So the banks know there is no chance of losing customers if they pass the costs through to customers.

Besides, what’s with the idea that the government is able to run a profitable enterprise? Taxpayers aren’t going to make money on the deal. Every dollar that goes to the government is a dollar that’s denied to the individual.

The fact is, Governments don’t make profits. They aggressively expropriate money – called taxation – from private citizens. And then they waste it by either spending it on themselves and the wasteful coercive sector, or they hand the cash out to their chums, such as Senator Conroy and his mate.

But take the farce of the Green Loans programme and the $850 million overspend on the solar scheme.

That’s proof that governments are incapable of managing money or running a profitable business. After all, if these dudes were any good at running a business they’d be out doing that rather than leading the life of a parasitic politician or public servant.

But the biggest point to come out of these ‘green’ schemes is that it gives you a preview to how an emissions trading scheme, or any other government sponsored carbon reduction scheme would work.

If the government claims the cost of its programme will be $40 billion, you can guarantee the real cost will be about ten times that amount. And we’re not exaggerating either.

The reasons are simple – the government has no profit motive, therefore it has no level at which it knows when to stop spending money. If it runs out of cash then it just takes more from the taxpayer.

Government obtains all of its money by force – through taxation. Therefore it does not have to justify its spending, and nor does it face competition from others who could provide the service for less – typically because the government prevents competition by law.

And don’t think the so-called cheaper option put forward by the Coalition will be any better. Both will involve an excessive cost burden on the taxpayer and the consumer, and neither plan will have any impact on global warming or cooling whatsoever.

As we’ve written before, the only solution to discovering whether there is Climate Change, and therefore whether to do anything about it, is to leave it to a free market.

You need look no further than the current disaster with green initiatives to see how your future tax dollars will be flushed down the toilet by the loony green lobby.

Cheers,
Kris.

It’s gained quite a following among those who believe in ‘Sound Money’ rather than fake paper or plastic money.

Which all sounds like a pretty good idea to us. But what about Australia? We wrote yesterday “Why it’s Time to Shut Down the RBA.”

End the RBA

Well, as it turns out, Australia has its own ‘End the Fed’ movement, only its version is of course, ‘End the RBA.’

We received the following email into the Money Morning mailbag from Jarrod:

“My younger Brother Seb has been protesting outside the RBA every second Friday morning for the last 3 months. After discovering Austrian economics about 3 years ago Seb and I have been compelled to speak out against central planning through central banking. I have attached a couple of photos above of this morning’s outside the RBA. As you can see it’s a lonely battle!”

And sure enough, here’s one of the photos he attached:

We can just imagine Jarrod and Seb standing there making their protest. Meanwhile young pup bankers and brokers stroll past, on their way to work ready to blindly soak up the pap and drivel they’re fed from the likes of Rory Robertson, Allan Oster , Shane Oliver and Craig James.

Or even worse, Saul Eslake!

Or they’ll read articles such as “How the RBA got it right” from our property spruiking pal Chris Joye.

So, hats off to Jarrod and Seb for staging their fortnightly protest in Martin Place. It’s pretty hard to honk your horn in support on Martin Place, so if you happen to see them the next time they’re there why not give them a pat on the back instead – or even join them!

But the point about ending the RBA and abolishing central banking is a valid one. In effect a central bank is given monopoly control over the money supply.

It and only it, controls the value of the dollar in your pocket.

It creates more money and allows its offspring at the retail banks to create more money so that each day the dollar in your pocket becomes less and less valuable.

The trouble is, you don’t even notice it’s happening.

We had a similar chat about this in the editorial office here on Fitzroy Street earlier this week. Diggers & Drillers editor Alex Cowie pointed out that in Roman times coins were devalued simply by making them smaller or reducing the gold or silver content!

According to Martin D. Weiss, PhD:

“The silver content of the most common coin, the denarius, was a hefty 90% in the age of Nero (54 – 68 A.D.). Two centuries later, by the reign of Claudius II (268 – 270 A.D.), it was down to a meager 0.2%.”

Invisible inflation

That allowed the Romans to produce more coins using the same amount of precious metals. But because they had the same face value they were deemed to be worth the same.

Naturally enough, if you know one coin has a higher gold content than another coin even though the face value is the same, you’ll be more inclined to favour the more valuable coin.

The definition of the devaluing of the coinage is inflation, and naturally it will cause prices to rise at merchants would have demanded higher prices for their goods knowing that the devalued coins are worth less.

And of course, who suffers the most? Those without the ability to hold the higher value coins, typically the poor or the less well off.

We’re no emeritus professor of history, but we’ve read enough to know that the debasing of the currency ultimately led to rampant monetary inflation and rampant price inflation.

Yet the same happens when banks create more money through credit. What makes it worse these days is that you can’t tell it’s happening. You can’t tell that your currency and wealth is being devalued just by looking at the $20 notes in your wallet or purse.

But they are. The monetary inflation that the Reserve Bank of Australia (RBA) is causing today is exactly the same as the monetary inflation that has been caused throughout history.

Put simply, the fresh new $20 that was printed last week is worth less than the $20 note when that was printed ten years ago. To you they look the same, sure the colour may have faded a little, but they both say $20.

Unfortunately, they’re both worth about half of what they were ten years before.

Of course, the problem is, with a paper based money you don’t have the advantage of just holding on to the older notes. Both the old note and the new note are equally devalued. That’s what makes the actions of the Reserve Bank of Australia and the banks so criminal – in fact, it’s the equivalent of theft.

And it’s that monetary inflation which results in banks such as Commonwealth Bank [ASX: CBA] holding less than 3% of depositors funds in cash reserves.

You see, once you start on the slippery slope of a fiat (paper) money system it’s hard to break the downward cycle. The more that’s created the greater the inflation which means the larger the devaluation which requires the creation of even more money.

And of course, the harder you need to work and the more risks you need to take.

Which brings us nicely to a couple of questions we’ve received from many readers over the last couple of days.

It’s these questions and the subsequent answers which help to explain why the banks hold such a low amount of cash reserves and why it forces individuals to take greater risks than necessary.

How inflation forces you to take risks

I’ll paraphrase the questions as follows:

“How would the banks make money if they didn’t lend out our savings? And if the banks are so crippled where should we put our cash?”

Well, let’s touch the first question. The point is – and it’s a trap we’ve fallen into before – the bank doesn’t lend out “your” money. The money it gives to borrowers is new money it’s created at the tap of a keystroke.

Your money always remains in your bank account. Think about it. You deposit your cash into an at-call account which you can withdraw at any time. When the bank makes a loan it creates money and pays that out to the borrower who then spends it on building a house or buying a car.

Despite that, you can still get your money out. That’s because the bank hasn’t loaned your money at all. The bank doesn’t tell you that you have to wait until the borrower has repaid the loan, or until someone else deposits money so you can have your money back.

The bank gives you cash when you ask for it.

Look, you may already know this but most people don’t. When was the last time you read an article in The Age or Australian Financial Review that mentioned ‘Fractional Reserve Banking’?

When was the last time you heard a banking analyst or business journalist ask a bank CEO how the bank’s fractional reserve banking is looking this year?

Never. Just type ‘fractional reserve banking’ into your search engine and see how many articles it comes back with. Apart from the odd blog entry and a few Money Morning articles, there’s nothing from the Australian mainstream media.

Considering that Money Morning and our sibling newsletter Daily Reckoning now has a total daily circulation over 90,000, which puts us ahead of the Australian Financial Review’s 79,201, we thought it was time this subject at least saw the light of day somewhere in Australia.

So, what the question should be is, “How would the banks make money if they didn’t create more money?” The obvious answer is, why should you care. You put money into the bank for safe keeping, you don’t deposit it as an act of goodwill to help someone else build a house or buy a car or help with the bank’s profitability.

When you buy a burger from McDonald’s you don’t think about whether the company is making a profit or not. You just want a burger.

The problem is, under the current banking system it would be hard for any bank to survive that didn’t create money. Because in all likelihood, the interest it paid would be less than with a fractional reserve banking bank, and it would need to attract non at-call accounts such as term deposits so it could actually lend out the same money that you’ve deposited.

Under a system where a competing bank can offer a 5% interest rate for an at-call account and create nearly as much new money as it wants, it would be tough for a 100% reserve bank to attract customers.

Furthermore, customers would be reluctant to use a 100% reserve bank because of monetary inflation. If you know that the money supply is being increased through credit then you need to chase higher returns.

That means depositing cash with banks that are paying higher interest – more likely to be those that practice fractional reserve banking – or taking even bigger risks by investing on the stock market or in property.

Make banks subject to counterfeiting laws

The only way to resolve the problem is to make banks subject to the same fraud and counterfeiting laws as everyone else. If a bank creates more money out of thin air then it should be prosecuted just in the same way as if you or I created money out of thin air.

Without that, banks will always create as much money as they can to keep pumping up the debt bubble.

In contrast, picture a scene with fractional reserve banking. Without the creation of money by the banks and central banks, banks that operated on a 100% reserve would not need to pay as much interest – if any – as depositors would not have to contend with monetary inflation.

If the value of your money was not being eroded by the central bank then prices of goods would be much more stable. Of course there would still be price volatility based on market forces such as supply and demand. Even so, you could deposit your money at the bank knowing that it won’t be devalued by the actions of fraudulent banks and central banks.

That leads to another question which we won’t answer today, but which we’ll save for next week. That is, wouldn’t innovation and economic growth stop if it wasn’t for credit? The answer is no, but as I say, that’s for next week.

Where do you put your cash?

As for the second question, where should you put your money if the banks are so unstable? The answer is that the government, central banks and the banks themselves have stitched you up.

It’s as simple as that.

Monetary inflation makes it necessary for you to either seek interest or spend your money. Therefore you’ve got to take risks. One of those risks is that you’ve got no other choice than to maintain a bank account – as your editor does!

Alternatives are obviously the stock market and property, but those involve risks as well. And probably too much risk if you’re someone nearing, or in retirement.

Your only saving grace with having money in the bank is the taxpayer funded government guarantee. But don’t cheer about that too much. After all, it’s really a kind of self insurance seeing as in effect you’re guaranteeing your own savings through taxes.

And, as we mentioned recently, if a bank did collapse you shouldn’t think you’ll be able to get your hands on all your cash at once. A perfect example of what would happen is the frozen mortgage funds. They’d dribble out small amounts at a time.

But as I say, we’re not revealing anything that hasn’t been written about thousands of times over the last hundred years. It’s just that in an Australian context, the mainstream press is too cowardly to mention the subject for fear of either ruining advertising deals or having their invitation to the next RBA cocktail party cancelled.

Cheers.
Kris.

We’re referring to the widely held belief that newspapers are editorially biased towards spruiking for the property market. It’s fairly obvious really.

You only have to pick up the Saturday edition of The Age newspaper with its three real estate sections to see that Fairfax makes a motza from the real estate industry.

Well, yesterday the ‘Benedict Arnold’ of newspapers, Marika Dobbin spilt the beans:

“The REIV is funded by real estate agents and, because of this, gets a higher rate of sales reported to it than say Australian Property Monitors. APM has the advantage of a national perspective and also claims to be more independent, although it is owned by Fairfax (owner of The Age), which sells real estate advertisements.”

So there you have it. I know it’s not exactly a ’smoking gun’ but at least it gives you some ammo when your mates accuse you of being a conspiracy nut job.

But of course, we don’t really need the newspaper men and women to tell us what we already know. The facts speak for themselves.

If newspaper sales are declining then your only other option is to scratch the back of the advertisers. Seriously, most of the property ‘reporting’ is more like advertorials than editorials.

At times we half expect the cheery souls from Danoz Direct to drop into the article telling you that if you buy one property they’ll give you a second for free!

Anyway, as we’ve pointed out before, it’s not just the real estate spruikers and the mainstream media that are in on the act, there’s the banks to worry about too.

It’s a right old triumvirate of trouble.

We should have short sold CBA

Not so long ago – two weeks ago in fact – we said that short selling Commonwealth Bank [ASX: CBA] shares looked like a good trade. The red circle on the chart pinpoints the spot:

If only we had actually written, “Short sell CBA now!” we could have crowed on about it. But we didn’t. In all honesty we thought there was still a chance the market could push the zombie bank higher.

Two weeks later and the CBA is down nearly 10% from its recent peak.

Quite frankly it’s still overvalued if you ask us. Based on what goes on the scenes behind this and every other bank, the share price should be around $1 – not a penny more. Here’s why…

Yesterday we took a peek at the Australian Prudential Regulation Authority’s (APRA) Monthly Banking Statistics. It’s been quite a while since we’d done so, but it’s always worth a look just to reinforce our belief that the banking system is one giant Ponzi scheme.

Seriously, the stuff you find out about the banks just by looking at the publicly available information is mind-boggling. You can only imagine the stuff that goes on behind the scenes, out of the public gaze.

Anyway, naturally enough we choose to pick on Commonwealth Bank. It is after all – by their own admission – the Australian bank with the biggest exposure to the housing industry.

What the banks do with your money

According to APRA, Commonwealth Bank has $277 billion of customer deposits. That’s money which you may have earned and which you’ve deposited at the bank for safe keeping – “Look after it folks, it’s all I’ve got” is what you may say if you had to physically deposit the cash.

So, you can imagine if every Commonwealth Bank customer logged onto their internet banking account at exactly the same time and wrote down the balance and then gave it to someone to add up all the numbers, the total balance of deposits would be $277 billion.

That’s reasonable enough isn’t it? That’s what you’d expect. And that’s exactly what you find.

However, thanks to the weird and whacky world of fractional reserve banking, guess how much cash the Commonwealth Bank really has in its vaults?

It has less than 3% of that amount held as “Cash and liquid assets.”

This is from one of the banks that’s touted as being one of the strong ‘4 Pillars’ of the Australian banking system.

Yet despite it being so strong, it only has enough cash on hand to meet 2.2% of its cash deposit obligations.

In fact, get this. Despite the CBA more than tripling the number of loans it’s issued in the last eight years, its cash reserves have actually fallen.

In 2002, the CBA had ‘Cash and liquid assets’ of $7.76 billion on its books, today it’s a pathetic $6.12 billion.

It’s the only one out of the 4 Pillars to have a lower cash reserve today than eight years ago. ANZ Bank and National Australia Bank have doubled their cash reserve, while Westpac has added marginally to it.

Now, the banks will argue, “Ah, but because markets are more sophisticated these days, we have cash tied up in ‘trading securities’ and ‘investment securities’.”

Just $2.20 for every $100 you deposit

Well that doesn’t make things any better. When you deposit your money in a bank account you do so because you want someone to look after it for you.

Right now, for every $100 you deposit in the bank, the CBA keeps just $2.20 in cash. Another $17.60 it invests in ‘Trading securities’ and ‘Investment securities’. And pretty much the rest it invests in loans to businesses and households.

The majority of it going to Australian residential property market.

It’s no wonder the mainstream economists are so panic stricken by the thought of another interest rate rise.

On reading the report from Fujitsu Consulting that 45% of first home buyers were facing mortgage stress, AMP Capital chief economist Shane Oliver said:

“This is a scary survey. It provides a clear warning to the RBA not to push rates up too far or too fast.”

But it’s not the first homebuyers per se that Oliver is concerned with, more likely it’s the need for AMP to offload several billions of dollars of mortgages onto the securitisation market:

“AMP, Australia’s second-biggest asset manager, almost doubled its residential mortgage-backed securities to $1 billion in the nation’s first sale of the bonds this year. AMP had planned to sell $543.5 million of bonds. It priced the main class of $920 million in notes to yield 130 basis points more than the bank bill swap rate.”

Yet again it’s another classic example of the mainstream economists getting economics back to front.

Each argument they make is more illogical than the last one…

Cheap money created asset bubbles which caused the economic meltdown therefore we need to make debt more available so people and businesses can borrow more to stop asset values from falling but this will cause another bubble as people and business borrow more because asset prices didn’t fall, etc…

And so it goes on and on and on. Each attempt at manipulating and already over-manipulated market just creates bigger problems.

And the Australian banking system is at the core of these problems. So, the next time your employer pays your wages into the CBA – or any other bank – just consider that for every $100 that goes in, the bank only ‘looks after’ $2.20, the rest it punts on the financial markets and the housing market.

Happy saving!

Cheers.
Kris.

[Reader spits coffee across breakfast bench]

Anyway, yesterday we promised to follow up with our ‘friends’ at the Commonwealth Bank [ASX: CBA] to find out what ‘Investment Experience’ means.

You’ll recall that bullet point five of the CBA’s profit upgrade announcement stated:

“Improving equity markets, contributing to a turnaround in ‘Investment Experience’ of approximately $240 million post tax.”

To which we responded yesterday with:

“It would be delightfully ironic if any of the ‘Investment Experience’ has come from its funds management branch, Colonial First State.”

Guess what, reader? Yep, you’re bright, you know what’s coming next…

A different ‘Investment Experience’ for investors

We put in a call to the Commonwealth Bank yesterday. We asked what ‘Investment Experience’ meant. They asked us, “What’s the angle of your story?”

Dumbfounded, we didn’t know what to say. All we could blurt out was, “Erm, to understand what ‘Investment Experience’ means?” Of course we should have asked, “What does the angle have to do with it?”

But then, as George Costanza knows, you always think of the best comeback line about two hours after the event.

Turns out the CBA would need to get back us. Which they did this morning.

And as it happens you’ll be pleased to know that ‘Investment Experience’ is a “line item on the profit and loss statement for the Wealth Management business.”

This is getting good, we thought. Having regained our composure we asked the killer question: “Does that include Colonial?”

BANG! “Yes. The Wealth Management business includes Colonial First State, Commonwealth Global Asset Management, and CommInsure.”

To be honest, we lost interest after he blurted out “Colonial First State.”

So there you go reader, you’ll be happy to know that Commonwealth Bank is making a whole bunch more money thanks to the freeze on the Colonial mortgage funds. Thanks to the funds in effect trading while insolvent, they’ve been able to reduce the impact of the rotten funds on the CBA’s bottom line.

As we’ve written previously, we’ve little doubt the banks own managed funds have an exposure to the frozen Colonial mortgage funds. The last thing they want is a fire-sale and the requirement to write down the value.

And the CBA certainly wouldn’t want to hand over more cash than it needs to for mortgage ‘assets’ it knows to be rotten.

If you’re an investor in the Colonial mortgage fund I’m sure you’ll be delighted to know that the upgrade due to ‘Investment Experience’ is courtesy of your inability to access your money.

We’re trying to think what kind of ‘Investment Experience’ investors in the frozen Colonial mortgage funds are having right now. Suggestions can be made on the Money Morning website when this story is posted later today.

But while we’re on the subject of rotten banks, we can’t help thinking they get smellier by the day. And we can’t help laughing at the fools being made of the mainstream press.

Today’s front page of the Australian Financial Review reveals: “Westpac rush puts pressure on guarantee.”

The story goes on, “Westpac Banking Corp went on a federal-government guaranteed borrowing spree at the end of last year… Westpac’s borrowing of $9 billion accounted for about 90 per cent of the total issuance and singlehandedly turned December into the biggest month for federal-government guaranteed debt since July.”

Banks make fools of the press

Poor old Michael Pascoe must also be spitting coffee across the breakfast bench this morning when he reads that headline. Because just two weeks ago he wrote in The Age:

“Big Four no longer banking on guarantee.”

He went on to write:

“There’s been a phoney war in recent months about the Federal Government’s bank guarantee with the occasional Big Four CEO suggesting it needs to be scrapped. As far as the Big Four are concerned, it’s already gone… But the real story is that ANZ hasn’t used the guarantee since July. It hasn’t needed to – and neither do the rest of the Big Four, the benefit of being among the very few AA rated banks left in the world and being based in a strong developed economy with a central bank and regulator that didn’t fall asleep at the wheel. No wonder the Big Four CEOs would happily wave goodbye to the guarantee.”

Ha, ha, ha… Could anyone be more wrong than that? But he’s right about one thing, the central bank and regulator “didn’t fall asleep at the wheel.” Although we wish they had fallen asleep. At least that way they couldn’t stuff things up any more than they already have.

Because far from falling asleep, to follow the motoring analogy, they’ve done worse. They’ve had their foot to the floor travelling at 120km/h driving through the economic equivalent of a school crossing.

But we’ll tell you what’s really phony, the misinformation coming from the banks about the strength of the banks. And even more worrying is the way the mainstream press just laps everything up and takes the crooked bankers’ words as gospel.

This continuing bilge about Australian banks being the best in the world with their AA credit rating is doing nothing more than suckering people into believing everything is fine.

Sucking them into believing it’s a great time to take out a glabzillion dollar mortgage just as interest rates are about to head north and property prices south.

A right royal housing crash

I mean, for goodness sake, they’ve even convinced William Windsor that now is a great time to buy property:

“It has been a terrific couple of days in Sydney and because of that I have joked I would actually like to buy a house in Sydney. So if any of you have got any properties for sale then please let me know.”

We wonder if he managed to drop in on any open for inspections while he was here. Perhaps Chris Joye and his property spruiking mates have volunteered to personally reveal the secrets of the Hedonic Index and how property prices double every 7-10 years.

I’m sure British taxpayers will be pleased to know a wad of their taxes is going to help prop up the Sydney housing market, just as they’re wallowing in negative equity.

Anyway, for one of our “strong” banks to need a $9 billion government sponsored bail out when it’s supposedly rated AA tells you the real story of the market.

It tells you that Standard & Poor’s still don’t have a clue about measuring risk. And it also tells you the banks are on the verge of falling into a precipice.

So reader, we think it’s time to add Westpac [ASX: WBC] to our ’short sell’ watch. Everyone knows – even the mainstream media – that Westpac has pumped the mortgage market hard over the last twelve months.

They’ve done their darnedest to increase market share in the full knowledge they’ve got the full support of the taxpayer standing underneath them.

But we’ll wait before we blurt out a short sell tip on Australia’s crummy banks. We’ll wait until we get the nod from Slipstream Trader technical analyst Murray Dawes. Of course, he’ll have to let his readers know about it first, but I’m sure he and they wouldn’t mind me telling you about it after they’re firmly positioned in the trade.

Because when this thing cracks there will be plenty of downside and plenty of opportunities to make a killing.

The moral of today’s story is, when banks start talking about ‘Investment Experience’, when they shaft the taxpayer to underwrite $9 billion of debt, and when the mainstream press tells you everything is fine, it’s a pretty sure sign that everything isn’t fine.

There will be more to tell on the banking story throughout 2010. I’m afraid you haven’t heard the last of this one…

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX 200 was down only seven points yesterday, closing at 4,868.20. However the lead in from the global markets overnight has seen the index open lower this morning.

The Dow Jones Industrial Average took a beating last night, down by 122 points closing at 10,603.15. The American market reacted badly to the news of China tightening its monetary policy, as many ‘experts’ believe this will slow America’s economic recovery. Read more about the US market here.

In the UK overnight, the FTSE finished at 5,420.80, down by 1.67%. The UK mining companies dragged the Footsie down based on information that China won’t be lending for the rest of January.

The Nikkei was lower by 27 points, ending the day at 10,737.52.

The price of spot gold dropped over $27 an ounce last night.

The price of spot gold in Australian dollars is trading at $1,221.98 while in US Dollars it is trading at $1,112.12. The price of silver in Aussie dollars is $19.68 and in US Dollars it is $17.90.

The Aussie dollar versus the US dollar is trading at USD$0.9103, and against the Japanese Yen JPY83.05

The strengthening of the US dollar overnight, saw the price of Crude Oil slide down 2.17%, closing at USD$77.61

For the biggest movers on the market yesterday click here…

Sell Australian Dollar and buy Japanese Yen – tick

Put options on Westfield Group – [screech!]

According to Richard F on the Money Morning blog, he has a much better idea than the Westfield trade:

“How about shorting RP Data – (ASX: RPX).”

Now that would be just spiteful wouldn’t it! It’s a thought though. They are super leveraged to the housing market. When that falls over you wouldn’t think there would be too many punters coughing up for their research.

Although let’s be fair about it. An even better trade would have been to have bought RP Data stock last year when it was trading for less than 10 cents per share:

Now it’s trading at just below 50 cents. We can only hope Mr. Joye and his mates took the opportunity to tuck in at what was clearly a bargain price.

The only problem with short selling RP Data is the lack of liquidity. If you look at the one-month chart below you can see it rarely trades:

You’d need bravery the size of basketballs to risk getting yourself in on a short position there. With such low liquidity it wouldn’t take much for someone to push the share price higher and suddenly you’d find yourself in a margin call and having to sell your house to cover the losses!

So, as a short selling proposition, I’d stay clear of RP Data.

Why not buy Japanese stocks?

There are a couple of other alternatives, but before I get on to those, a quick note on the Sell AUD, Buy JPY contrarian trade.

First, you can read Slipstream Trader editor Murray Dawes’ take on the Aussie dollar in the companion article.

But buying the Yen is potentially just the first step. Rather than paying to hold Yen – because you’re forfeiting interest payments on Aussie dollars – you could go one step further and follow the advice of The Daily Reckoning’s Bill Bonner.

Bill thinks the trade not just for 2010 but for the entire next decade is to buy Japanese stocks. Aside from the obvious – Sony, Toyota, Honda – your editor couldn’t tell you a single thing about which Japanese stocks to buy.

But if you like the idea – and again, this isn’t advice, just information – the easiest and probably lowest cost approach is to buy the iShares MSCI Japan exchange traded fund. It trades on the ASX with the ticker IJP.

You can buy and sell it just as you do any other share traded on the market. I’m not saying you should go for it but… ah, why not, I like the Japan trade idea. Look at the chart below to see the twelve month performance:

If you go for it, just be careful when placing orders as it’s also reasonably illiquid – yesterday less than five thousand shares changed hands.

Anyway, back to the bearish property strategy…

Other suggestions have been that Westfield isn’t a great idea due to its exposure to the US and UK markets. Something more local would be a better bet.

We had another look at all the commercial property trusts and not surprisingly the best time to short sell them would have been eighteen months ago. Many of them are still in the red by 80% or 90%.

Short selling them now is certainly possible, but there’s probably better options.

Commercial property trusts still well down

Something like the SPDR S&P/ASX 200 Listed Property Fund [ASX: SLF]. As the name suggests it’s a listed fund made up of a number of individual trusts which are also listed on the ASX.

In fact, we had recommended it as a buy to Australian Small Cap Investigator subscribers earlier last year as a way to get exposure to the potential bounce in the property sector. That happened to some degree, however we only picked up just over a 20% gain before advising subscribers to cash out in November.

But the most obvious idea is one we overlooked. If you’re bearish on Australian residential property then surely you’d look to sell the company with the biggest exposure to it.

It’s a proverbial no brainer.

And with the share price of the company in question back to pre-crash levels, thinking about doing something soon isn’t such a bad idea. Here’s the chart:

It’s Commonwealth Bank of Australia [ASX: CBA] of course.

Go for the biggest when selling short

As the company proudly admits, it’s the safest of the four major banks because it has the largest exposure to Australian residential mortgages [gulp!].

Of course, short selling something just because it’s high isn’t always the best strategy. Especially if the price goes even higher. So for this one I’m happy to defer to our resident Slipstream Trader and technical analyst Murray Dawes.

I asked him this morning what he thought of the idea. The upshot is that it’s not a trade Murray would make right now, and it’s not a trade he’d recommend to Slipstream Trader members just yet.

However, he does think there’s an opportunity for a quick swipe at it on the short side, providing you’ve got your stop order placed close behind in case it swings the other way.

But in terms of a Contrarian Investment Idea for 2010, getting in to a short position on CBA looks premature. We’re not thinking of short term trading ideas, we’re thinking about longer term progressive downward movements in the share price.

Plus you want to protect yourself against potential losses as well.

One way to do that is with what the guys at City Index call a ‘guaranteed stop loss’ order. I won’t give you all the details here because I don’t have the space. All I will say is that it’s a good way of knowing exactly what your maximum loss will be before you make the trade.

That’s got to be worth something.

It’s certainly a good idea if you want to trade on the short side but are worried about getting ‘caught short’ and losing a bunch of cash.

Anyway, I think that pretty much settles our 3 Contrarian Investment Ideas for 2010:

• Buy gold
• Sell Aussie dollar, and buy Japanese yen
• Short sell CBA – but not just yet!

But as I wrote earlier in the week, if you’ve got any other ideas or you think our contrarian ideas are rubbish, feel free to make comments when on the Money Morning website when this article is posted later today.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX 200 was down yesterday to 4,868.10, lower by 31 points. The positive lead in from the US has seen the index open up nearly 20 points higher this morning.

The Australian Bureau of Statistics will release their figures on the labour market today, and these will include the unemployment rate.

The Dow Jones Industrial Average closed at a 15 month yesterday. The Dow ended the day at 10,680.77, up by 53 points. However Bruce Bittles, a chief investment strategist at Robert W. Baird, is worried that expectations are a too high and the market is “suffering from a little too much optimism”. Read more about the US market here.

Overnight in the UK, the FTSE dropped 0.46% to close at 5,473.48.

The Nikkei closed at 10,735.03, lower by 1.32%

Gold continues to dominate the news this week after another short rally last night. Spot gold gained about USD $9 overnight, based on speculation that the Fed will keep rates at these unnatural lows for an extended period.

The price of spot gold in Australian dollars is trading at $1,232.66 while in US Dollars it is trading at $1,138.11. The price of silver in Aussie dollars is $20.18 and in US Dollars it is $18.63.

The Aussie dollar versus the US dollar is trading at USD$0.9236, and against the Japanese Yen JPY84.37

Crude Oil closed at USD$79.67

For the biggest movers on the market yesterday click here…

Over at Daily Reckoning we gave the Climate Change ‘tree’ a bit of shake. You can check out what we had to say later on today after our webgeeks post the article to the Daily Reckoning website.

But on this side of the building on Fitzroy Street we’re taking another swipe at the banks.

Last week we tipped our cap to Westpac for trying to make a buck out of the interest rate rises by anticipating the Reserve Bank of Australia’s next move.

NAB spoiled the party by just raising by the same amount as the RBA, but then Commonwealth Bank and ANZ Bank rode in to split the difference between the two.

As we noted last week, the idea that the RBA can manipulate interest rates to perfectly control an economy is a complete fallacy.

It just can’t be done.

But anyway, the actions from the banks show just how desperate they are, and how close they are to insolvency.

As the back page of today’s Australian Financial Review points out, “[Westpac CEO Gail] Kelly’s aggression in home lending in 2009 delivered strong profits in the short term but it is now causing issues for the bank’s liability management. Westpac wrote $29 billion in new home loans in the year to September.”

You’ve seen the stats on home loans over the last year. A big percentage have come from first homebuyers who have been suckered into the market by the first homebuyers bribe.

It’s hardly likely that Westpac would have gone ‘underweight’ on first homebuyer’s mortgages. They would have lined up with the rest of them to get as many suckers onto their loan books as possible.

We mentioned above that the banks are close to insolvency, actually, there’s not much difference between the balance sheet of the banks and that of the frozen mortgage funds we wrote about last week.

The only difference is the banks have a government guarantee.

But aside from that the story is fairly similar. In some respects it’s worse because most of the bank’s deposits are in at-call accounts. That means accounts where savers have immediate access to their funds as opposed to a term deposit.

Yet on the other side of the balance sheet, the bank’s assets are tied up for the long term in mortgages and houses. The $29 billion of loans Westpac has written is against mortgages last 25 or 30 years.

But the savings inflows that have enabled the bank to make those loans would be mostly in at-call accounts. In other words the bank has let someone borrow your money for a term of 25 years yet the bank has no power to stop you from ‘calling in’ your funds by taking the cash out of your account.

It probably explains why the banks have been so desperate to raise more funds from the overseas markets using the government guarantee, and why they have been so quick to increase the interest rate on deposit accounts to discourage investors from withdrawing funds.

For instance, ANZ Bank has increased the rates on some term deposits by 0.75%.

It’s all part of the cycle of rising interest rates that we warned readers about earlier this year. And it’s these interest rate rises that will flow through to the inflation numbers as well.

While the mainstream has been harping on about inflation being dead, we see it differently.

Rising interest rates means a rising cost of living. And for individuals it means a coordinated attack from two sides.

You see, when interest rates go up, your disposable income goes down. You don’t need a Harvard degree to work that one out.

But by extension it also means your cost of living has gone up. Even if prices don’t rise, your cost of living has increased because you now have less money to spread across your weekly and monthly obligations.

The banks and property spruikers will tell you it’s “only” an extra $45 per month on an average mortgage, but they conveniently forget to mention that it’s $45 per month on top of $45 last month and $45 the month before.

They also forget to mention that in total, that’s $135 per month of after tax dollars that has to come from somewhere.

Does it come from savings? Maybe, but more likely it comes from your disposable income.

The individual this month has $135 less than they did three months ago. And chances are by the end of next year you can double and possibly even triple that amount as interest rates rise even further.

But that’s not the only place where individuals get stung. Because aside from the lower disposable income, the rising interest rates mean businesses that have borrowed will need to increase prices to cover their increased costs.

For all the rubbish about the rate of inflation being low at 2-3%, the real rate of inflation is much higher than that. It’s closer to 10% if you use the RBAs money supply figures.

So don’t think the interest rate increases have stopped there. By their own admission the RBA says rates are at emergency low levels.

It’s only a matter of time before rates are pushed up further, that price increases are filtered through to the consumer and the recession/depression that Australia famously avoided earlier this year rears its head.

On top of that, there’s the prospect of a further tax sting when the Stable Climate deniers get their way and foist a massive tax burden on the Australian public just at the time it needs it least.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 finished down on Friday to 4,702.20, lower by 72 points. The market has opened up this morning, however you can expect a choppy trading session today.

The Dow Jones Industrial Average ended the day higher by 22 points, closing at 10,388.90. The positive news regarding unemployment pushed the Dow to finish up, but could potentially lead to the Fed lifting the near zero interest rates. Read more here.

In the UK overnight, the FTSE was up 9 points to 5,322.36

The Nikkei was up to 10,022.59 higher by 44 points. The index added a total of 10.4% for last week, its biggest weekly gain in one year.

The price of spot gold in Australian dollars is trading at $1,270.65, while in US Dollars it is trading at $1,161.90. The price of silver in Aussie dollars is $20.22 and in US Dollars it is $18.49.

The Aussie dollar versus the US dollar is trading at USD$0.9150, and against the Japanese Yen JPY82.48

Crude oil closed at USD$75.47

For the biggest movers on the market yesterday click here…

Australian banks charged a total of $11.6 billion in fees during 2008. Exception fees accounted for $1.16 billion (10 per cent) of banks’ total fee income. Banks raked in approximately $960 million in penalty fees from households and $200 million from business customers.

Exception fees are typically charged by a financial institution when a consumer makes a late payment, overdraws an account or exceeds a credit limit. Most of these fees are pure profit for the banks. Analysis conducted by Deutsche Bank has revealed that 87 cents in every dollar a big bank takes from a customer in penalty fees is pure profit.

Bank fees can be very confusing. With several banking products available in the market, and with different terminologies used to describe the nature of the fees charged on these accounts, it is no wonder consumers often get confused or lose track of the fees they are paying. A simple understanding of when and where you get charged fees can help significantly reduce your fees by minimising the situations giving rise to fees.

Australian banks charged a total of $11.6 billion in fees during 2008. Exception fees accounted for $1.16 billion (10 per cent) of banks’ total fee income. Banks raked in approximately $960 million in penalty fees from households and $200 million from business customers.

Exception fees are typically charged by a financial institution when a consumer makes a late payment, overdraws an account or exceeds a credit limit. Most of these fees are pure profit for the banks. Analysis conducted by Deutsche Bank has revealed that 87 cents in every dollar a big bank takes from a customer in penalty fees is pure profit.

Key changes for exception fees:

ANZ

Currently customers are charged a flat rate of $35 for all honour, dishonour and periodical payment non-payment fees. Overdrawn, over-limit and late payment fees are also charged at $35. However ANZ Access Basic account customers (students and concession card holders) are charged $10 for these Exception Fees.

Commonwealth Bank

• Dishonour Fees will reduce from $35 to $5 on all personal and business transaction accounts. 

   

• Overdrawn Approval Fees will reduce from $30 to $10 on all personal and business transaction accounts 

   

• Late Payment Fees will reduce from $45 to $25 on all home, investment and personal loans

NAB

• Account Overdrawn Fees will be abolished from $30 to $0 on personal transaction and savings accounts

Westpac

• Account Overdrawn Fees will reduce from $40 to $9 on all personal and business accounts 

   

• Outward Dishonour Fees will reduce from $35/$50 to $9 on all personal and business accounts 

   

• Periodical Payment Not Made Fees will reduce from $35/$50 to $9 on all personal and business accounts 

   

• Missed Payment Fees will reduce from $35 to $9 on all credit cards and personal loans 

   

• Over-Limit Fees will reduce from $35 to $9 on all credit cards and personal loans