Frydenberg’s ‘Magic’ Is Lenin’s Prophecy

Monday, 3 May 2021
Wollongong, Australia
By Greg Canavan

[4 min read]

Earnings season for Aussie banks kicks off this week.

Westpac reported a better than expected set of results this morning, with underlying cash earnings of $3.8 billion for the six months to 31 March. This represented a 60% increase on the same period last year.

Underlying cash return on equity came in at 11% (annualised). The market liked the result. The share price is up more than 4% at midday.

Clearly, the economy is on the mend. And when the economy is on the mend, the banks do well. They both create money and intermediate the flow of money throughout the economy. Given the combination of massive fiscal and monetary stimulus over the past 12 months, it’s no wonder the banks are, once again, rolling in it.

But, from a longer-term perspective, this may be as good as it gets for the middlemen and ticket clippers.

Having said that, I don’t think this is a short-term peak for the banks. They are likely to enjoy benign conditions for some time.

Why?

Politics…

Australia is set for a federal election next year. The government will keep its foot to the floor to make sure the economy is awash with cash for some time longer. From Paul Kelly in The Weekend Australian:

The Morrison government has embarked on its economic and political strategy for the next election — it will fuel the recovery tank all the way to creating more jobs, lower unemployment, big ­social spending and fidelity to ­income tax cuts.

Scott Morrison and Josh Frydenberg have banished the word “austerity” from their agenda.

The Australian economic model run by John Howard and Peter Costello a generation ago has been put into recess. Morrison and Frydenberg face a different challenge. And Frydenberg has settled upon the defining idea of his period as Treasurer — that a better society of full employment, job creation and improved service delivery is the key to a strong economy.

Budget repair in its own right is not the immediate policy goal. “The best way to repair the budget is to repair the economy,” Frydenberg said this week. The COVID emergency phase of JobKeeper is over but fiscal stimulus will remain, though at a lower level to ­reduce unemployment to having a 4 in front of it, thereby hoping to drive up wages.

In essence, the new world says governments must do more. This is the story in the US and across the West. With the Reserve Bank near neutralised and sitting on record low interest rates, fiscal policy steps into the breach.

The Morrison/Frydenberg government has hoisted its colours — it stands for growth, jobs, the good society and it will postpone tough budget repair decisions for a number of years. It seeks a better balance between the economy and society.

The Treasurer described the “magic” new equation that makes this possible: “Treasury’s projections are that nominal economic growth will exceed the nominal interest rate for at least the next decade. That is, economic growth will more than cover the cost of servicing our debt interest payments.” This is the foundation on which activist economic policy is being built.

Nominal economic growth running in excess of ‘inflation’ might be magic in the eyes of a treasurer keen on re-election. But what it really means is that currency debasement will continue.

When you have to resort to currency debasement to ‘fix’ things, you know you’re running out of ideas.

In The Economic Consequences of the Peace, John Maynard Keynes quoted Vladimir Lenin as saying ‘The best way to destroy the capitalist system is to debauch the currency’.

There is conjecture over whether Lenin really said this. Regardless, it’s a fair point. But on the way to debauchery it’s all good times.

That’s where we are now.

It’s little wonder that a brand new monetary system is in the design phase. It’s digital and difficult to understand. But it’s happening anyway.

We think this is such a revolutionary moment in finance that we are launching a brand new service to track its evolution. To find out more about the things that we will cover, you can click here.

Which brings me back to the banks. They’re enjoying great conditions now. But this new system is the ultimate disruptor for the ultimate middleman — the banks.

How long it will take the players in this new monetary system to start eating their lunch is anyone’s guess. But in five years’ time, the outlook for the banks will look very different.

I say that with a few banks in the Greg Canavan Investment Advisory portfolio. I recommended readers buy NAB and Westpac last year. At the time, the market was fearful over the economy and the banks’ exposure to bad debt. But they were cheap. I figured the bad news was in the price.

I don’t get them all right, but that was the correct call. The sector has outperformed strongly.

And while currency debasement is the aim of the game, they are likely to continue minting money.

Please keep this in mind if you’re sitting in cash waiting for the market to return to normal. There is no normal in a world of currency debasement.

Save in gold, not worthless government paper. Own quality stocks that generate real earnings and cash flows.

And, if you’re wondering just how to manage all this, check out this presentation. It’s an awesome risk management tool. It tells you how much of your investment capital to allocate to each stock to equalise risk, whether a stock is trending higher or lower, and when to get out.

That’s just for starters. I use it personally. I find it very helpful in keeping track of the stocks in my portfolio and managing those positions effectively.

Our special offer for getting access to this tool closes tonight. So if you’re interested, don’t muck around.

Continue below for Murray Dawes’s ‘Week Ahead’ update. Today, Murray gives you a detailed look at the current technical situation and explains why he thinks Telstra may be ready to run.

Cheers,
Greg


[WATCH] Telstra Ready to Run

By Murray Dawes

 

Telstra Corp Ltd [ASX:TLS] has been a terrible investment for a long time.

But the charts are hinting that Telstra could continue rallying to the upside in coming months.

The first question that you have to ask yourself when planning an investment or trade is: ‘Where am I proven wrong?’.

The current set up in Telstra makes answering that question quite easy.

If the all-time low of $2.55 is breached in future, there will be a mountain of stop-loss orders set off.

You wouldn’t want to hang around for too long below there.

With Telstra trading around $3.50, it means you would need to risk about 30% of the price of the stock to find out whether Telstra can start to trend higher from here.

I give you a detailed look at the current technical set up in the video above.

Regards,

Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader