Your Money Isn’t Yours

Finally, the boring, bullish month of August is over. Let the drama of September begin! September is traditionally the most dangerous month of the year for stock market crashes. If it holds true to form, the next crash will catch investors blissfully unaware. The bear likes his meat fresh and full of delicious, juicy hope.

American markets will take Monday off to celebrate Labor Day. It’s a well-earned rest. The S&P 500 was up 3.8% in August, its best month since February. Aussie stocks didn’t fare as well. If you play with the numbers a little, you get a 4.38% rise from the August 8th intra-day lows to the August 21st intra-day highs. For the calendar year, the S&P ASX/200 is up 5.17%.

But let’s not talk about price action. Let’s talk about things that really matter, like business earnings and profits. The reporting season is over. The numbers were alright, at least superficially. 54% of Australia firms exceeded analyst expectations in terms of revenue. What’s more, 65% increased their dividends.

In the spirit of raining on a parade, though, I have to point out a troubling fact: You can’t grow a business by cutting costs. Earnings per share (6.3%) grew faster than revenues (5.2%), according to data from CIMB reported in the Australian Financial Review. That’s only possible in a universe where cost cutting is the key driver of earnings growth. And that is not a universe that’s friendly to higher share prices.

That last line is more of a claim than fact. But here’s my point: You can make investors happy by cutting costs and increasing dividends (up 7%). But if a business doesn’t reinvest cash in future growth, there will be less cash to pay out later. Businesses are not automated teller machines that exist to deliver annuity payments to shareholders. Growth requires investment. Investment requires cash. The national obsession with dividends — perfectly rational from a tax perspective — is detrimental to the formation of the nation’s future capital stock.

Besides, there is no investment boom in the pipeline for Australia. It already happened. It was called the Mining Boom. When Wednesday’s GDP figures come out, don’t be surprised to see a negative number for the June quarter. The consensus expectation is for 0.3% growth according to Bloomberg. The Reserve Bank of Australia expects 0.4%.

Speaking of the RBA, it meets tomorrow to discuss interest rates. That should be exciting! The Bank has nowhere to go with rates right now. The cash rate’s been steady at 2.5% for over a year now.

Low interest rates have spectacularly failed to ignite an investment boom in the non-mining sectors of the economy. There is a myth that the Australian economy is in the middle of a ‘re-balancing’. But the economy is fundamentally unbalanced, with houses and banks and mines on one side, and everything else on the other side.

Low rates have been great for the housing market. But can you see the RBA’s dilemma? With flat or negative growth, it can’t raise rates. It would probably like to raise rates to take some steam out of rising house prices. In the middle of the night, Glenn Stevens must wake up and fret about how little monetary policy can actually achieve.

It’s not all the Reserve Bank of Australia’s fault, either. Chinese nationals are driving up home prices for all Australians by paying 20-30% premiums on homes at the top end of the property market, according to buyers’ agent David Morrell. Is this financial xenophobia or financial fact?

Morrell told the Financial Review that Chinese buyers are pushing up home prices all along the property ladder by swamping the market for trophy homes above $10 million and houses between $1.5 and $3.5 million. He’s called for the Foreign Investment Review Board to investigate whether property agents and lawyers are helping foreign buyers illegally enter the market. Why would it be illegal?

Read the rest of this article at The Daily Reckoning