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“"Top-tier sales versus, say, Brazil."”
Now, your columnist hasn't been paying much attention to the Brazilian financial system; curiously, there have been recent signs that inflation was at its peak.
But shorting Australian banks? Are you sure, Mr. Hartnett?
Readers in general will understand that this column thinks very highly of Hartnett's work; he may be a bear, but he has thoroughly studied this environment and remains very concerned about what is to come, which he described this week as a "rapid inflation shock, slow recession shock".
He argues that "the nominal boom is still driven by the use of inflation, fiscal stimulus, and the previous period of wealth accumulation," but a recession is coming, starting in Europe and spreading to the US.
Hartnett's view is that persistent inflation will lead the Federal Reserve to raise rates to 4% and keep them there, perhaps, until 2024, when inflation finally returns, as opposed to the Fed's target of 2%.
Housing costs are soaring worldwide, and Hartnett is right: the drop in Australian spending is grim.
The facts of the last week showed that apartment prices in Australia fell in August at the fastest pace in forty years (it's even worse than you suppose, Mr. Hartnett!), dropping 1.6% across the eight capitals in August, down 4.2 percent from their April high.
There is definitely a compelling common sense within the theory that wherever condominium expenses go, Australian banks – piled up to their necks with mortgages as they are – will follow.
Furthermore, there is an argument to be made that this condominium fee cycle may be different from those observed in the last 25 years, which basically saw top-down 10% declines followed by a short recovery.
With household debt levels higher than ever, spending may have far less room to recover than it has in the past.
If Hartnett is correct about persistent inflation, a return to the extremely low costs that drove spending sky-high is likely underway. A deeper drop in housing expenses could be intelligently accompanied by a slower recovery.
However, there are decent reasons to be cautious about short selling by Australian banks as well.
The first is the story: there are reasons why this has been called the "widowmaker" trade.
Australian buyers love dividends and love their banks, which are among our most consistent dividend payers. Therefore, weaknesses in the shares of financial institutions are often seen as a buying opportunity, especially with the help of retail traders.
According to the Shortman website, short positions within banks are very small, ranging from 0.34% short (ANZ) to 1.17% (Westpac and Commonwealth financial institution). For comparison, the most sold stock on the ASX is Flight Center, where 15.4% of stock is held short.
If there's one aspect of the hobby reflected in these numbers, it's the CBA (Consumer Binge Area), where the short hobby period is at a peak of three to twelve months, despite clearly having a low base.
And although apartment prices have decreased, banks haven't exactly fallen. Shares of CBA and NAB rose 2.6 percent and 4.9 percent, respectively, while ANZ stock is up 8.3 percent and Westpac is down 4.8 percent.
The different counterpoint to Hartnett's view is that banks are undoubtedly entering a period of margin growth as activity rates increase.
Citi bank analyst Brendan Sproules says that while the boom in bank profits seen during the August earnings season has cooled, partly due to effective competition in the mortgage sector, better wages are on the way.
“"The fast rate increases in June, July, and August, with higher expectations of compliance, unless 2023 likely conveys very different effects from financial institutions FY23 compared to FY22.".
“"Early signals from ANZ and Bendigo & Adelaide bank indicate that the short-term effect could be quite robust, given that mortgage and deposit prices have not been consistent across the stability period. This has put the bank's management in the precise position of how to speak publicly about rate leverage.".
“"Therefore, with little advance guidance on the factors in the forecasts, buyers were relying on retrospective mortgage price dynamics. We think this will be an aberration, and for that reason, we maintain our wonderful outlook on the sector."”
Household expenses have much more room to fall. However, it is no longer so clear whether the bank's actions will deliver.
