Ctrl-Alt-Del The Reserve Bank of Australia
The title may be controversial but it’s time to sack the Reserve Bank board and replace it with the members of Federal Reserve. I said it, I mean it and I need to get it off my chest. 2015 has been a complete circus performance by the RBA – a comical event that has global investors laughing at Australia as they continue to pull their money out and invest it in places with real growth and opportunity.
In one of my earlier columns this year I wrote that the ASX 200 was poised to enjoy a period of outperformance to the S&P 500 as it would rally to the 6000 level and beyond buoyed by a Reserve Bank that would begin to help the Australian economy with a series of rate cuts. I did something I have never done in 20 years – listened and believed the RBA.
Well we got those rate cuts and the enjoyment seen following the first rate cut in February has been completely unwound with the ASX 200 below the 5700 level that it was trading at the start of February. Even a follow up rate cut in May failed to create any optimism. In fact we are still trading at the same levels as we were in October 2013.
The Australian dollar is trading slightly higher than where the first rate cut occurred! And why? Because the RBA completely stuffed up the timing of the rate cut, the message it gave to financial markets and its delivery. The rate cut matters only 1% to financial markets, the other 99% is how it’s delivered.
Let me explain. The RBA leaked to the media that a rate cut would occur in February and it delivered the 25bp rate cut with the message of its post meeting statement of more rate cuts to come. After all what does one rate cut do? It wants the Australian dollar lower to help Australia better adjust to a post-mining boom era. So it needs to keep cutting rates a couple of more times.
Markets quickly priced in a high probability of a rate cut for March and if not in March then almost near certainty that a rate cut would occur in April. The rate cut came in May. Sorry boys that is way too late. When markets experience such disappointment it takes a lot to earn that trust and respect back. Error one, not cutting in March. Error two, not cutting in April.
The failure of the RBA to cut rates in March and April also sent the Australian dollar roaring from 76c to almost 80c. Effectively by disappointing markets the exact opposite happened to what they wanted. The Australian dollar rose and not fell, so in essence by not cutting it was a quasi-tightening. They failed to think even one step ahead of what would happen by not giving what financial markets wanted. Error three.
The raising Australian dollar forced the RBA to cut rates in May. They stated they wanted to see the effects of the first rate cut before cutting again. Econ 101 tells you one rate cut does nothing to the economy and even if it miraculously did, it would take far too long for any economic boost to appear in any statistics since most data is released monthly and quarterly. So that is error four. You would think it stops there but it doesn’t. It actually gets worse.
Next in its May post meeting statement it dropped the reference to having an easing bias. This effectively suggested the rate cut cycle was over and if another rate cut were to come it would be after a barrage of woeful data that would again force them to cut rates. Error five. The ASX 200 almost immediately fell (dropping 300 points in two days) while the Australian dollar jumped 4 cents from 78c to almost 82c. I am certain this is not what the RBA wanted. In fact the market reaction was so severe the RBA had to restate it’s monetary policy intentions stating that it still would consider cutting rates further. It did that within the same week. What did the RBA think was going to happen by dropping its easing bias?
So local investors from two rate cuts have been left with a stock market that is one of the worst performing markets in the world that isn’t about to default on its bonds. The ASX 200 has dropped nearly 10% from the 6000 level and the Australian dollar is no lower than the start of the year – the result of losing all confidence of financial markets and investors.
The RBA believes it can “talk” the Australian dollar down. By simply saying it’s overvalued and that the local economy was still suffering from the aftershock of the mining boom it would decline naturally. But has anybody noticed that anytime Glenn Stevens talks or we receive any RBA statement the Australian dollar rallies? And simply because they feel the need to comment on Sydney property prices every single time they discuss the outlook for interest rates. That only delivers the message that they don’t want to lower rates as they are scared of what property prices are doing in a 50 kilometre radius of the postcode 2000. Another error. How many is that? I have lost count.
Way to govern monetary policy by holding the rest of the economy hostage to one small part of the economy. The fact that there is a major long-term housing shortage in Sydney and aggressive foreign buying are much greater influences on property prices than the 50 basis points in rate cuts. In fact the latest upswing in Sydney property prices had occurred well before the February rate cut. Prices have been rising aggressively for the past two years – so maybe RBA interest rates cuts in 2015 have less influence on sky-high Sydney property than the RBA believes.
So the RBA’s management of its two rate cuts have effectively done nothing to benefit investors and in fact have done so much damage that Australia is now completely off the radar screen for foreign investors. The sell down in the ASX 200 is being used to fund investment elsewhere as global fund managers relocate funds to better opportunities.
In contrast the Federal Reserve is doing a brilliant job of managing market expectations. I stated two weeks ago that financial markets were starting to misprice the potential for a rate hike this year and that spikes in yields were creating some concerns for US equities. Federal Reserve chair Janet Yellen this week confirmed our view that a rate hike will occur in Sept/Oct and that if economic performance allowed a second rate hike might occur this year but that the normalization of rates would be very slow and gradual. The blatant statement by her that markets should not be focused on the timing of the first rate hike but on the trajectory of rate increases, which would be extremely slow – saw a positive reaction from equity markets. She was able to deliver a message of a worse scenario than equity markets were expecting (possibly two rate hikes this year) with the reward that rates will still remain very low and steered market attention to where she wanted to ensure market stability. Stock markets rallied strongly even in face of risks of a Greek default. Brilliant job. And she didn’t even find the need to mention what New York property prices are doing either!
One final point on the RBA performance. In the world of trading one wrong trade can ruin you. And when the RBA hiked rates in 2008, after the ASX 200 had already plummeted by more than 20% - that should have been the end of Glenn Stevens. An action of that diabolical nature on any trading desk would get you fired (on my desk anyway) and the fact that the RBA still don’t understand financial markets and deliver rate cuts in the correct format shows nothing has changed.
This week was a bit of rant, but someone has to show the RBA performance for what it is and until the RBA can restore market confidence in Australia – I have followed the funds offshore and now 98% invested in the US. I would happily take Janet Yellen out to dinner as a reward for her performance, sorry Glenn all you get is my Opal card.
Greg is the Head of Proprietary Trading at Gleneagle Securities and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.