The Royal Commission and big bank theories

President Trump wants his tax cuts passed through the US Congress by Christmas, and this week he took a major step towards that goal when opponent John McCain came on-board. I have detailed the implications of the tax package – a higher US dollar and interest rates, plus higher US economic activity – in my previous commentaries. But I promised to keep you updated.

The politically correct press still does not take Donald Trump seriously. I might be wrong, but I think he will get most of his package through the Congress because he working very skilfully behind the scenes. The President Trump of December 2017 is entirely different from the one who took office at the start of the year. He has learned a lot. Again, I will keep you posted.

The Royal Commission will test the market

Now, back home to the Commonwealth Bank.

When a major announcement takes place, very often the very best guide to the impact is that initial stock market reaction. And so, when the Royal Commission into “banking” was announced on Thursday, there were small falls in the price of Westpac, ANZ and NAB, and a more significant fall in the price of the Commonwealth Bank.

In reality, the Royal Commission might be focusing on the entire industry. But really, when you get down to the nitty gritty, it is going to be a Royal Commission into our largest public company, the Commonwealth Bank.

Looking back, I can't think of a strong profit-earning company being subject to so much pressure. Traditionally, pressure is applied to companies that have run into financial bother. The Commonwealth Bank is clearly not in that category, but think about the terrible trials its top executives and middle-ranking people must now face:

• A Royal Commission into all aspects of their business;
• An AUSTRAC court case involving 500,000 bank accounts, with allegations of money laundering which might have led to terror financing;
• A whole series of new rules on their lending, leading to an announcement by the bank that it was substantially upgrading its lending standards;
• A housing market that is cracking in certain parts, while strong in others;
• The regulator APRA imposing a review on executive and board appointments, which could lead to them being vetoed;
• And then, finally, challenges from all sorts of areas involving high technology.

I find it hard to imagine just what it must be like to be inside the Commonwealth Bank war room at the moment. You've got to keep your job, you've got to muster the most incredible amount of detailed information, and then have that information examined by highly skilled people looking for multiple scandals.

A lot of executives will not be able to take that pressure and, of course, the Commonwealth Bank's CEO is leaving, and a new person has to come in to supervise all that as well as run the company.

My first reaction was that it would hit the profits of the bank, but then, just before the Royal Commission was announced, all four banks issued a joint statement and I realised that, at least for the short term, banks are not going fight over market share. They are going to quietly lift their profitability, and they need to because those lending clamps APRA is forcing on the banks are going to cause a reduction in the amount of money that is available to the housing market. Given it was bank money that played a big role in lifting prices, the absence of bank money will have the reverse effect.

The current dwelling fall is basically confined to Sydney, Melbourne and Brisbane's apartment market, plus apartment land. It will spread to other parts of the dwelling market. For example, the Commonwealth Bank is not going to lend to suburbs that are “not desirable”. You can only speculate which suburbs will be declared “undesirable”, and what is going to happen to dwelling prices in those areas when the bank switches to other areas.

That sort of crazy bank decision happens when you are under pressure and you don't think about the consequences of what you are doing. Expect more of that from the Commonwealth Bank.

But, in the meantime, profits in the banking sector will improve until the current demise of apartment prices spreads more widely. There is a good chance that overseas lending institutions will demand a higher rate from Australian banks, which will go straight through to the customer in this environment.

I have been nervous about the Commonwealth Bank because I have feared that the AUSTRAC court case will result in much bigger damages than the market expects. If anything, a Royal Commission increases that danger because it will create a scenario of bad decisions and crisis, which will make the money laundering look much worse and take it beyond a series of mistakes. I emphasise, that is a danger and not a certainty.

But, just remember that the Commonwealth Bank is a wonderful business, and while it is true that it will be put through the wringer with all these events, it will come out the other side. But those that have over-exposure to the banking sector now have a much greater risk than they did a year ago.

And, I now repeat what I have written in previous commentaries: The Reserve Bank understands what is happening in the apartment market and is highly unlikely to raise interest rates, but the situation in the US is different.

Why the jobs statistics don't add up

One of the great mysteries of Australia is why, with unemployment falling, wages fail to increase. We know that our leading companies are planning to increase the salaries of their top 25 per cent of people, but there is nothing in the pipeline for the remaining 75 per cent. Similar trends occur in the US, and there has not been a really good explanation.

But then I read a piece in Fairfax Media from an old friend of mine, Peter Jonson. I remember Peter at the Reserve Bank and the ANZ Bank and he has a good mind. His basic point is that we have been fooled by the unemployment statistics that are produced by the Australian statistician.

But, for many years, Morgan Research has been showing that the actual level of unemployment and under-employment is many times greater than the official figures indicate. The statistician established a set of rules to calculate unemployment that was designed to make politicians look better. Of course, ordinary people are not privy to the inner workings of the statistician, but they know that amongst their friends and colleagues there is substantial unemployment and under-employment.

In other words, they simply don't believe the statistics because that is not the experience they are encountering. And, if you realise that your job is not secure and your friends are underemployed, you're reluctant to push for a wage rise even though the situation has improved. And so, we have created a mystery from a set of false statistics.

If we look at the true statistics, then it is easy to show why wages aren't rising.