There are good bubbles, such as the periodic tech booms that suck in capital and supercharge innovation.
There are bad bubbles, such as those in real estate, which only temporarily inflate wealth and leave a destructive load of bad debt when they pop.
And there are stupid bubbles, which add nothing much at all, then pop, leaving behind a shuffling army of gutted investors.
Arguably, today’s Australian bank bubble falls into the final category.
Advertisement
Bank prices are at extremes for no apparent reason:
Even grossed up, you get a better yield in a zero-risk CBA term deposit:
Advertisement
In terms of global positioning, local banks are now at ludicrous valuations:
And against a select few excellent international peers, some with far better earnings growth prospects, it is bowel-shaking hilarity:
Advertisement
I look at that first chart and note a similar period in 1999 as the tech bubble melted up, even though the Aussie economy had no exposure to it.
It was also led by an irrational CBA rerating.
Advertisement
Likewise, this time, Australia has limited exposure, though may benefit in the long run from productivity gains.
Perhaps markets are of the view that the Australian economy is about to boom as interest rates stay high supporting bank margins?
If so, I would point to the top chart again and the peak of the last tightening cycle in 2010, as well as the subsequent decade in which Australia’s key bulk commodities collapsed in value and interest rates fell from 4.5% to zero.
Bank valuations roughly halved.
Advertisement