Watching Mario Draghi’s Bubble Blow
Here at The Daily Reckoning Australia we keep waving our tattered flag for the downbeat and dispirited investor.
We keep planting our mast on the same spot too. The world is getting much better, and not worse. That’s our stand.
I’ll show you one reason for that in a second.
But let me say first: cheer up, there’s money to be made! Indeed, the market is moving up in early trade today despite the money laundering allegations surrounding the Commonwealth Bank.
You know I’ve been banging the drum on one opportunity in particular: Amazon coming to Australia.
If you saw my brief note this morning, you’ll know yet another Aussie business tycoon is waiting to reap the opportunities Amazon’s arrival will bring. Others are still touting the death of the traditional Aussie high street. There’s just so much on this story in the press now.
I find it kind of funny actually. I said back in July 2016 to watch out for this. Now the mainstream guys are all pontificating on about it and what a disaster it is for retail.
The share market has moved on, if you check out some of the stocks affected. Some of them are moving back up again.
Look beyond the mainstream headlines. The question is not now about who loses in retail or anywhere else.
That is now obvious, and priced in as best as the market can. The question is now who benefits.
And yet we don’t know much other than Amazon is setting up in Dandenong. Anything beyond that is speculation.
But I can guarantee you one thing about Amazon: they’re going to need to deliver the products people buy. It’s pretty simple, but wouldn’t you agree?
So who benefits from this?
But let’s leave that for the moment. Let me show why boom times are still to come…and why I keep flying my tattered flag in the face of scepticism and mockery.
The Royal Bank of Scotland in the UK has made a $1.5 billion profit in the six months to 30 June.
That’s a nice change considering the bank has lurched from collapse to losses for years after 2008.
A nice healthy bank profit tells us people are borrowing and spending in the UK. Don’t forget the mainstream economists in 2016 had Britain going into some sort cultural and economic wasteland if the Brexit vote went ahead.
The scare campaign never squared with the economic reality that Britain needs more European bureaucrats like Australia needs more wombats and koalas.
I actually wrote about Royal Bank of Scotland back in June, 2015. I said at the time the UK economy would improve as the bad debts from the 2008 were sold off and dealt with. We’re seeing the same thing in Italy now.
And if you think things are hot now, wait until you see what’s happening in Germany…
The Royal Bank of Scotland would’ve been bankrupted and history today if the UK government hadn’t bailed it out after 2008. It helps to have friends in the right places.
The big German players Commerzbank and Deutsche Bank are finding this out right now. The European Central Bank (ECB) is doing a wonderful job of wiping out their competition for them.
You see, Germany has one of the best and most stable banking systems in the world. Historically it hasn’t boomed and busted in the same way as the US and UK.
Unlike the UK and Australia, there isn’t three or four big banks that dominate the sector. In fact, the big two German lenders only have a 30% market share between them.
That’s because all over Germany are local, not for profit banks called the Sparkassen. These are required by law to lend to their local communities. This means they mostly provide credit to local businesses. They also invest their profits into the local area as well.
And no, they don’t try and gear up every young German with a lifetime of housing debt.
And what does Germany end up with? A highly profitable economy, with good wages and a very high standard of living.
That’s changing, because Mario Draghi, head of the ECB, is wiping out the business model for these community banks. The low interest rate regime he’s imposing on Europe is killing them.
The Sparkassen banks can hardly make a profit with interest rates so low. They now also pay fees on their reserves at the central bank as well. That drives up their costs just as their income is going down.
This is forcing the smaller banks to charge for things like ATM withdrawals to make some money.
Now, the big banks get hurt on low rates too. But the big banks have different parts of their business, like investment banking, where they can make some money to offset this.
The ECB is giving the small German banks a ‘good sweating’. This enforced distress means that many of these small branches and operations are going to close. The big banks are going to mop up the market share.
We can’t say for certain that it’s deliberate policy of the ECB for this to happen. But we know from history that central banks ally with the powerful banks over everyone else first.
We also know from that the incentives within the Germany economy will change. Big banks like to lend to big firms (over small business) and real estate players.
Why should you care about this?
There’s a bubble blowing here…
Well, Germany is going through a pretty heady real estate boom of its own right now.
Historically, Germany’s ownership rate is very low. Because of the tax and banking structure, real estate doesn’t move in the same way we’re familiar with here in Australia.
It means you could rent in Germany and not worry about rents and prices going through the roof underneath you.
That too is changing. Prices are moving, and the return on savings so low now, that Germans are bucking to get into real estate.
The ECB’s low interest rates are blowing up a real estate bubble in Germany.
This could be big. It’s the biggest country and economy in Europe. It’s not going to end anytime soon either.
This is the way things are headed.
Now consider the implications…
With Germany booming, the UK recovering and now Italy on the mend, it’s quite possible the world could find the USA, China and Europe all firing at once.
That alone could be enough to send share markets worldwide into a final ‘melt up’ phase and bring on the boom-time psychology we need to see for share markets to get really hot.
The time to position for this is now.
If I’m right, the surge in 2018 especially could blow my little flag right out of the ground.
Editor, The Daily Reckoning Australia