Friday! It's been a big week.
Hikes, hikes and more hikes.
This week wasn't a good one to be a borrower.
The RBA increased rates by 0.25%, much to the chagrin of many a forecaster who had confidently predicted they'd stay on hold.
That was despite the RBA saying more hikes might be necessary.
Did I predict it? No. I don't do predictions, because they're not very useful, and often wrong. See above!
The US Fed also raised rates.
And… the Australian government raised the tobacco excise.
Yeah, it's been one of those weeks!
Inflation is still too high. Central banks might have more to do (though the Fed removed a reference to future rate hikes which was in the previous statement, leading some to think it might be done).
I'll write more about it tomorrow, but for now there's not much to do but buckle up and hang on.
Another sort of banking hike
Which will stick in the craw of many a borrower paying more for their mortgages. I dare say the banks might have wished they'd released these numbers a week earlier or a week later to avoid the direct comparison!
But, a few things: According to NAB, profits peaked during the quarter and margins had started falling by the end of March. That's likely why shares fell 6% on the day.
Second, I'm no fan of oligopolies and their unusually strong pricing power. I'm also not a fan of the string of US banking collapses, recently.
There is absolutely a middle ground, but we should be a little careful what we wish for.
There are hundreds of banks over there. Which… is great for competition, but apparently not great for financial stability.
Badly run? Probably.
Taking silly risks? Almost certainly.
A risk to the global financial system? Yes, but hopefully not a big one.
The financial markets seem comfortable that the US and European banking regulators have this one covered. I hope that's not a false hope.
I don't think it is, for the record… but plenty of people might have said the same in the first couple of months of the GFC. We can never rule these things out.
Bad loans? I hope we don't find out they were…
Speaking of which… ANZ reported today that around 30% of its borrowers are now paying interest rates that are higher than those used to approve their loans.
Which is… madness, surely?
If you're a bank CEO, in theory job number 1 (and 2 and 3) is risk management.
If 30% of your loans are now priced higher than the level at which they were qualified… that doesn't strike me as particularly prudent risk management.
"But everyone did it!" they say.
And this is where I turn into my mother and say "If everyone else was jumping off the Harbour Bridge, does that make it a good idea?"
Thanks Mum. That came in handy.
But maybe the bankers' mothers might need to give them a refresher course… if it's not too late.
A lesson, perhaps from the then-CEO of Canadian bank, TD Bank, who told CBS News in 2009 when discussing the GFC:
"We should never do things for our customers and clients that we don't actually understand. If you wouldn't put your mother-in-law in this, don't put our clients in it."
"We will make more money in this quarter than any bank in North America. So for a little Canadian bank sitting up here, yeah that feels pretty good."
"Basically, because we didn't do the things that blew other banks up."
Or Warren Buffett, talking about insurance:
"The reaction of other people when premiums are wrong is to take more risk. And our reaction when premiums are wrong is just to go play golf or something and tell somebody to call us when premiums get right again."
Did the banks have to make loans at those levels? No.
Would the market have crucified them for pulling back? Probably.
Does that make it right?
I know the answer. Our Mums know the answer. Our bankers – and maybe the stock market – seem not to know. Or not to care.
I hope we don't find out in a very expensive way.
Again, I don't think we will. But we can't rule it out.
And I don't know how you can have a third of your loans at rates they weren't qualified under – and let's assume it's not materially different at other banks – and say you've been prudent.
One last one: Speaking of prudence, I'll bet you a small amount of money that this week's 'profits' will end up too high, in hindsight, having under-provided for (i.e. not putting money away to cover) future defaults.
Overblown: I'm incredibly frustrated by the 'The RBA is killing us' commentary, as if the Reserve isn't the only adult in the room, having to make up for other failures and inaction. Rates are higher than they should be… but that's because the Government is doing too little, not because the RBA is negligent.
Underappreciated: Groupthink. Kinda related to the above. Kinda just in general. But one observation: When, for a lark, I asked the new AI 'bot', Chat GPT, to tell me which ASX companies had a competitive advantage, it seemed to struggle to find one that actually didn't. Can that be true? No, but because it uses public information, and everyone describes their company as having one, AI just tells us what it's found. Which isn't to say AI is useless… but there's still plenty of opportunity to find a 'variant perception' if you're looking to beat the market.
Fascinating: For all of that, though, AI's ability to synthesise facts (subjective opinions might need some more work!) is astonishing. There's not a day when I'm not blown away by what it can do… and how far it's come in such a short time. Don't bet against AI.
Where I've been looking: Actually, this time I'm going to talk about where I will be looking next – and that's the annual meeting of Berkshire Hathaway (I own shares), being held this weekend, where Warren Buffett and Charlie Munger will spend the better part of six hours teaching us how to be better investors. Don't miss it! (It'll be livestreamed on the CNBC website, though it's in the very early hours of Sunday, Australian time. Maybe watch the replay!)
Quote: "I'm right, and you're smart, and sooner or later you'll see I'm right." – Charlie Munger