- Has the market missed this obvious ‘tell’?
- In the mailbag
According to a Bloomberg report today:
‘A Donald Trump victory in the U.S. presidential election in November would probably lift gold prices, according to the mint that refines almost all the bullion output from one of the world’s biggest producers.
‘“If someone like Donald Trump does get himself elected, it will stimulate some fear within the economy as to where things are going,” Richard Hayes, chief executive officer of the Perth Mint, said in a Bloomberg TV interview. “Trump is very much a protectionist, he is very much for almost ‘Fortress America’.”’
There’s another reason to back gold in the event of Trump becoming president. Have you seen photos of the inside of Trump’s Manhattan home?
This will give you a taste…
I’ve never been inside the White House. I’m sure it doesn’t have austere décor. But I’m also sure that, when it comes to gold, it’s no match for chez Trump…
Over the weekend, the Dow Jones Industrial Average fell 24.11 points, or 0.13%.
The S&P 500 gained 3.54 points, or 0.16%.
In Europe, the Euro Stoxx 50 index closed up by 24.66 points, for a 0.83% gain. Meanwhile, the FTSE 100 added 0.05%, and Germany’s DAX index gained 0.61%.
In Asian markets, the Nikkei 225 index is up 5.25 points, or 0.03%. China’s CSI 300 index is down 1.13%.
In Australia, the S&P/ASX 200 index is up 28.74 points, or 0.52%.
On the commodities markets, West Texas Intermediate crude oil is trading for US$41.76 per barrel. Brent crude is US$43.71 per barrel.
Gold is US$1,350 (AU$1,774) per troy ounce. Silver is US$20.56 (AU$27.02) per troy ounce.
The Aussie dollar is worth 76.1 US cents.
Has the market missed this obvious ‘tell’?
Almost since day one, we said the whole idea that the world was deleveraging was a sham.
Your editor isn’t a smart PhD economist on Wall Street. We didn’t go to Oxford, Harvard, or Melbourne Uni.
And it’s unlikely that CNBC or Bloomberg will call us to be a ‘talking head’ on one of their shows.
But that doesn’t matter. You didn’t need any of that to know that, ever since the world’s central banks began printing money in 2009, and governments began injecting their economies with stimulus in 2008, deleveraging was myth rather than reality.
Despite that, the mainstream continued to trot out the same old stories. They’d swear blind that governments were cutting back on spending — they called it ‘austerity measures’.
They claimed that businesses and individuals weren’t borrowing or spending either.
The story was that credit growth had stopped…and that’s why the central banks needed to keep printing money.
Of course, it was hogwash. Yet it wasn’t until McKinsey & Co released a full analysis of debt growth in 2015 that anyone bothered to believe deleveraging was a sham.
Governments hadn’t cut spending at all. Governments had increased spending. What they had cut (in some cases) was spending growth.
But cutting spending growth isn’t the same as cutting spending. To analogise it, deleveraging would imply that, rather than driving your car forward at 50km/h, you’re now driving it in reverse.
But that’s not what happened. Instead, governments were still going forward, only not quite as fast — perhaps, 45km/h.
And based on the McKinsey & Co report, it was the same story for individuals and businesses.
As you can see from the table below, lifted directly from the McKinsey report, from 2007 to 2014, debt grew at a rate of 5.3% per year:
Source: McKinsey & Co
Click to enlarge
It’s true that household debt grew the slowest, up on average by 2.8% from 2007–2014, compared to 8.5% annual growth during the previous eight years.
But governments have more than made up for that shortfall. Government debt worldwide has grown 9.3% per year from 2007 to 2014.
What’s more, if you know your ‘Rule of 72’ well, you’ll know that, at an annual rate of 9.3%, it takes just under eight years to double your money — or in this case, to double your debt.
That means, assuming debt growth has continued on the same path, government debt today will be more than double what it was in 2007.
How about that for a sobering thought?
But while governments have pulled out all the stops to increase debt and attempt to prevent a worldwide recession, don’t ignore consumer debt. To do so would be a mistake.
As the Financial Times warns:
‘US banks have ramped up lending to consumers through credit cards and overdrafts at the fastest pace since 2007, triggering concerns that they are taking on too much risk in a slowing economy.
‘The industry has piled on about $18bn of card loans and other types of revolving credit within just three months, as consumers borrow more and banks battle for customers with air miles, cashback deals and other offers.’
You don’t need to look much further than the income statements of the big US banks to see how their businesses have grown thanks to debt.
Take JP Morgan Chase & Co [NYSE:JPM]. Its ‘Net interest income’ has increased from US$21 billion in 2006 to US$43.5 billion last year.
The bank’s ‘Total interest income’ actually peaked in 2008 at US$73 billion. However, that year, ‘Total interest expense’ (the amount the bank pays to borrow) was US$34 billion.
Last year, ‘Total interest expense’ was just US$7.4 billion.
You know why. That’s right, low interest rates. The banks may not rake in as much interest on a gross basis these days, but, thanks to low interest rates, they aren’t doing so badly.
One reason for that is the still relatively high interest rate charge on credit cards.
As the FT also notes:
‘The credit card business remains among the most profitable in banking. Lenders can charge much higher interest rates — the US average is between 12 and 14 per cent — than for other types of credit, and borrower delinquencies are still low by historical standards.’
We wonder if the credit card business could be the banks’ giveaway ‘tell’.
A ‘tell’ is a term taken from gambling. It’s in the subconscious. If you’re a poker player and you’re dealt a good hand, you may subconsciously give away to your opponents that you have a good hand.
It could be that you raise an eyebrow, purse your lips, touch your nose, or raise your chin slightly. To you, it’s imperceptible. It’s likely imperceptible to most other folks too — except for other players who strive to unearth their opponents’ ‘tells’.
If (and admittedly, this is a big ‘if’) interest rates are still a measure of risk, and if the economic recovery is genuinely so strong, why are credit card interest rates still so high?
Home loan rates are low, government bond yields are low (many are negative), car finance rates are low…but credit card interest rates remain high.
Why is that? The answer is simple: Credit card debt is unsecured debt. If you default on a home or car loan repayment, the bank can take possession. At the very least, it can put the home or car on its balance sheet.
But if you default on a credit card loan, it’s unlikely the bank will recover anything it can put on its balance sheet.
It’s a sign that, despite the worldwide trend towards much lower interest rates, the banks still see huge risks with unsecured credit card borrowings.
If they didn’t…if economic growth was strong…credit card interest rates would be significantly lower.
To be clear, we’re not going to jump up and down, demanding banks cut credit card interest rates. Far from it. We’ll let the financial system set interest rates based on their perceived level of risk.
Sure, it’s true that the relationship between risk and interest rates isn’t what it used to be. The idea that Spain would have an interest rate of minus 0.177% on its two-year government bond still seems ludicrous to us.
That the Italian government’s two-year bond is minus 0.067% is equally bizarre.
And even Portugal’s positive interest rate of 0.399% doesn’t seem to match reality, given where the country’s interest rates were just a few short years ago.
So, if we can no longer use sovereign debt markets as a gauge of risk, we have to look elsewhere. In truth, we’re not sure that the stock market is an accurate gauge either — not with US markets trading near record highs.
And neither is the ‘junk bond’ market, where ETFs such as the SPDR Barclays High Yield Bond ETF [NYSEARCA:JNK] continue to climb after hitting a low point in February.
That doesn’t leave us many places to look when it comes to measuring risk. We could look at the payday lending industry; but even there, governments have distorted things by introducing caps on interest rates.
The only place that may still provide a clue on the riskiness of lending and borrowing is the credit card market.
Based on the increased borrowing levels, and the high interest rates, we can only conclude that the banks are secretly and subconsciously ‘telling’ us something.
It seems to us that it’s worth paying close attention and not ignoring what could be a giveaway sign.
In the mailbag
Subscriber, Richard, writes:
‘The figures published in this newsletter, quote:
Gold is US$1,319 (AU$1,755) per troy ounce. Silver is US$19.64 (AU$26.13) per troy ounce.
The Aussie dollar is worth 75.18 US cents.
End of day market data
Gold is $US 1,319.44, and $AUS $1,762.32. AUD/USD 0.7488.
‘Every day these sets of numbers differ, could you please explain why?’
I wondered when someone would pick up on the inconsistency.
The explanation is quite simple. The ‘Markets’ commentary near the top of Port Phillip Insider is one of the first things I type up each day.
It helps to blow the cobwebs off the fingers, by typing something familiar. Then I can crack on with the rest of the quality/sub-standard (delete as you deem appropriate, dear reader) editorial.
The numbers in the ‘End of day market data’ section are typically taken at around 4.20pm AEST, each day. This is the last piece of the daily issue that we slot into place.
So, the prices you read at the beginning of Port Phillip Insider will reflect when I begin tapping away at the keyboard. That means the ‘Markets’ info could be up to 4–5 hours old by the time you read it.
Nonetheless, you may still find it useful.
I hope that clears things up.