The Tale of Interest Rates and a Penny Dividend

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So in the end the Reserve Bank of Australia cut the cash rate. It’s now at a fresh record low of 2.25%. Around we go again: that means higher capitalised values for dividend paying stocks, bonds and property. Commonwealth Bank [ASX: CBA], NAB [ASX: NAB] and Telstra [ASX: TLS] all coasted to new highs after the RBA announcement.

Yield, I tells ya! Where can we get some? Retirees, savers and people hoping for secure income from their term deposits have some thinking to do. If that sounds like you, you might like the sound of Port Phillip Publishing’s new income project.

A new analyst arrived at the Albert Park command centre this week. His mission, I’m told, is to find the best dividend stocks on the ASX. Stay tuned for more on that.

Speaking of dividends, did you see British banking giant Lloyds is set to pay its first dividend since the global financial crisis? I find this a significant development.

Some background first…

For years the bank was one of the highest dividend payers in the City of London. Then came the wipeout of 2008. It hasn’t paid a dividend since.

To give you some idea just how blind its directors were to the risk in the market at the time, consider this: In August 2008, the company announced an interim dividend. I’m sure at the time there were the usual platitudes about growing earnings, prudent lending, rosy outlook — blah blah. A few weeks later, the UK government was on the hook for a 20 billion pound bailout. Lloyds was toast.

That’s why the UK government still owns 25% of the company. Now, the coming dividend is not going to get anyone excited. It’s likely to be one British penny a share. That’s about two cents Aussie. But any dividend is still cash out the door for Lloyds.

That indicates that the bank is slowly coming back to a reasonable footing. Lloyds passed a stress test recently. This fits in with our broader theme over at Cycles, Trends and Forecasts — that it won’t be long before the banks will be back into easy credit.

You might think we’re in easy credit times right now. But it depends on which way you look at it. Economist John Maynard Keynes used to talk about Bank Money and State Money.

State Money is what the world has plenty of right now. That’s the stuff central banks have been pumping out like confetti since 2009. But the growth in Bank Money (loans that private banks make, like when you take out a business loan) in Europe, the UK and the US has been minuscule. That’s because the banks have had to write off bad debts and hold more capital.

Think of capital ratios like a leash on the amount of credit the banks can create. The higher the capital ratio, the tighter the leash. The problem for the economy is the banking system supplies it with credit. That also forms the money supply. If banking credit is tight, the economy is on a leash too.

The intricacies of the financial system, by the way, are the specialty of my fellow writer, Greg Canavan, over at Sound Money. Sound Investments. In fact, we liked his latest play in the market  so much we’re going to put it in front of CT&F readers as well. Check it out here.

Bank credit is less constrained in Australia, because the banking system never had the same crisis as their peers overseas. But Australia’s economy is tiny compared to the EU and US.

Australian banks are actually moving on at a fast clip doing what they do best — financing property loans. The Australian Financial Review reported on Monday that, ‘National Australia Bank is growing its loan book faster than its major rivals and Macquarie Bank is still surging ahead on its home loan grab.

This follows on from the news last week that Bank of Queensland boss Jon Sutton has ‘vowed’ to lift the bank’s low rate of home loan growth.

Oh dear. Instead of financing entrepreneurs and businesses — you know, the things that actually grow a productive economy and raise the standard of living — here we go again spending most of our time buying and selling houses. That’s not all. The AFR reported on Monday that the capital gains exemption on the family now totals $46 billion a year.

Of course, the banks love this. Higher residential prices mean bigger mortgages, which means more credit (debt) and more profits (for them).

So, yes, the RBA cut the cash rate. Did anything about Australia’s economy really change? Nope.

Regards,

Callum Newman,
for The Daily Reckoning Australia

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Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.
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