Bitcoin bubble and a banking enquiry

This week James Kirby and I discuss:

  • The banking royal commission
  • Let’s look under the carpet of Aussie banks
  • Kirby want to know what really goes on in the banks 
  • Bitcoin bubble? 
  • Buyers pushing it to the limit 
  • No intrinsic value makes it hard to assess bitcoin
  • James says it’s gonna end in tears 
  • Part of the appeal is that the stock market is so boring!

Hello, I’m James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, publisher of The Constant Investor.

And we are The Money Café.

The Money Café.

And it’s a rather hot Money Café we have for you this week, folks.  We are sitting in our favourite café, Saporito of South Melbourne.

Which is not particularly air conditioned.

It’s not but it’s better than outside.

Well, the air conditioning, if there is any, is struggling to be honest.

Well when we launched this podcast in May, Alan, we had several weeks where we used to talk about how dreary, cold and windy it was outside.  Now it’s about 36 degrees and absolutely baking out there in downtown Melbourne this afternoon.  It’s also a very lively week on the market, it really is, and this often happens towards the end of the year where you get some big news.  But, hard to beat this morning where after a long political game of chess, the Prime Minister very reluctantly announced not just an inquiry but a good old fashioned full bore Royal Commission into the banks.  What you reckon?

Well, I was looking back at Bill Shorten’s first announcement of Labor’s plan to hold a Royal Commission into the banks which was April the 8th 2016 when they had a big press conference.

Right, a year and a half ago.

A year and a half ago, and they announced Labor’s plan to hold a Royal Commission which was roundly attacked by the government, of course, saying it was a shocking idea and it would absolutely tear down the banking system and all of this stuff.  Of course, what’s changed in the past couple of weeks is that the National Party has got on board or at least a few rebels in the National Party and ironically the reason they’ve got on board is payback for same sex marriage.

Yeah, I don’t quite see the link, do you?

Well, there is no link apart from it’s like stuff you, because the National Party, right wingers, are very upset at the Liberal Party leadership for backing same sex marriage and they’ve gone with the bank inquiry.  This is that bloke – I can’t remember his name now, the National…

Barry Robertson is it?

Yeah, Barry O’Sullivan or…

Barry O’Sullivan, I can’t remember, he’s famous for a day.  He will be a footnote in history as the man who triggered the bank inquiry.  I might be severe on him there but I’ve never heard of him anyway.

But the other thing that happened, of course, is that after the National Party got on board and they put in the bank inquiry legislation and so on the banks themselves wrote to the Prime Minister asking for a Royal Commission.

Yes, PR.

And so it was quite a long letter signed by all the CEOs and all the Chairmen asking for the Royal Commission.  So, really…

Yeah, but that is so two-faced because the Head of Business Banking at Westpac this morning, at least yesterday afternoon, said that a big inquiry into the banks would be – he trotted out all of the usual unconvincing arguments.  You know, pre-occupation for the bank leaders, waste of taxpayers’ money and then he went the whole way and said that they could actually lead us towards economic collapse, if you don’t mind.  I mean really, let’s have a bank inquiry, let’s look under the carpet.  I’m ready for it, I must say.  I’m talking not as a customer, as a bank shareholder I want to know what really goes on in the banks and what don’t I know.  I know how badly they behaved and I know what journalists dug up with very little resources, I’d really like to see what a Royal Commission would find out.

Yeah, I think it’s going to be great, it’s going to be very interesting.

A blood sport, of course.

And if I could just plug The Constant Investor here because Stephen Mayne, who works with me at The Constant Investor, got the first interview with a bank Chairman today on the subject of the bank inquiry.

Which bank Chairman was that?

Lindsay Maxsted of Westpac did an interview with Stephen this morning at 11:00 o’clock which we’ve published already.  I haven’t had a chance to listen to it yet but Stephen came out of the booth having interviewed him quite excited.  So, it was a good interview.

Good for him.  Well, I think that banks represent about 30% at least of the stock market and for many people share portfolios, the backbone of most share portfolios in Australia now is not mining stocks and BHP any longer but it’s the banks.  I think they’re entitled to know just how are these banks actually run, how do they work and they are protected by government, explicit government guarantee on their deposits.  So, having gone this far I think as long as it’s quick, it doesn’t have to be extended – that’s the only point I would take about the banks that’s fair, it shouldn’t go on forever.  I think it’s a year, is it?

It’s one year, one year $75 million.  Bill Shorten’s proposal April last year was two years $53 million, so that was twice as long and…

No, twice as long is not twice as good.

Yeah, well actually if Bill Shorten – if they’d done it April last year it would be nearly finished now.

Yes, yeah that’s very true.  The other thing, the argument about banks being pre-occupied and that it will take their time and they won’t be able to get on their jobs.  I mean really, there’s a senate bank inquiry every other week, they probably have a set time allotted to trot out in front of bank inquiries anyway.

Yeah, and they’ve probably all got separate staff who are dealing with it.

They have, of course, yeah.

You know, so it’s the ‘wheel out the inquiry’ team again. 

I think the issue will be not so much banking per se, as in customer banking and transaction banking, but the other activities insurance, life insurance, that’s where you’re really going to see because they’ve got exemptions from the disclosure rules and I think that’s where you may really get some reward for digging a little deeper and you have that power.  I presume this Royal Commission – I’ve never actually witnessed a Royal Commission, there hasn’t been one for a long time in any area that I follow.  You can subpoena people, right, so you can actually bring them under court order to come and they can’t say no, isn’t that the difference between a Royal Commission, staff, they’re under oath.

And they’re under oath.  It’s serious and good on them, I mean I think it’ll be fine.  I mean it’s not going to drag down the banking system, probably the transparency will probably do them good I think.

I think it will do them good long term because as I say I think people want to know what they’re investing in and Commonwealth Bank is the biggest stock in the market, it’s already back to $80, it hasn’t been affected financially, I believe, by all these scandals and I don’t know if it actually would be financially affected by a Royal Commission either but I think it would be a very youthful cleansing exercise to take on in all the banks but specifically I’m pointing the finger right there at Commonwealth Bank because they have the worst record and that’s pretty clear.  Okay, well that was a big one, wasn’t it, this morning.  The other big one – it’s amazing because there’s two huge stories this week, the other is Bitcoin.  Well, the bell rang, if you like, because it crossed $10,000 US on Wednesday morning and then it went to $11,000 in about an hour and then it fell all the way back down to $9,000 and something this morning.

And now it’s gone back up to 10,500.

Has it?

Yeah, it’s back above 10,000 now.  So, it’s a rollercoaster.

What you want to own is not Bitcoin but an exchange that benefits from the turnover in Bitcoin because that’s where it’s really happening.  I tried yesterday to find some numbers because I saw this very interesting story in the US where Coinbase I think it is, the biggest of the exchanges, said they were signing up 300,000 people a week, new account holders.  Then, Chris Weston of IG Markets – and they have an interest, right, because they run CFDs on Bitcoin.  He said that they had a 500% increase in their number since the start of the year trading Bitcoin.  So, it’s one of the few windows into Bitcoin.  So, I rang him and I talked to him and I said tell me what’s going on.  He was very slow to reveal the numbers that they’re getting but he said that they’re hitting their internal limits every day because there’s no liquidity because people are only buying.

That’s right, no one’s selling.

No one’s selling, so when you have that the broker itself is in danger, aren’t they?  Because they’re exposed on liquidity funds, it just isn’t the liquidity in the market but the…

Yeah, but it’s not going to hurt them.  I mean this is typical bubble behaviour where there’s no sellers or buyers, price gets driven up and at some point there are no buyers or sellers.

Yeah, and I can never remember – and I include the dotcom bubble in this – I can’t remember a time where so many people were interested in something in our world, financial world, as Bitcoin.  I am being asked at every turn and twist and turn what do I think of Bitcoin, are you?

Yeah, all the time.

What do you reckon of Bitcoin.

And in particular is it a bubble, right.  I keep saying I don’t know and I’ve been saying on the ABC news that I don’t know whether it’s a bubble and somebody wrote in to tick me off and say it’s your job to find out, is it a bubble or not.

But you don’t know when the bubble is going to burst.

But the trouble is you only know if a thing is a bubble if it goes well above its intrinsic value.

But, how can you figure out its intrinsic value.

That’s right, exactly, so you can’t know when there’s a bubble if you don’t know what its intrinsic value is.  Well, actually it has no intrinsic value.

Warren Buffett says it’s a bubble and that’s good enough for me, Alan.  He’s the world’s greatest investor, he said you can’t value it and it has all the hallmarks of a bubble.

Yeah but Warren Buffett is in his 80s, I mean he is being left behind, he’s got no idea.

He has never been left behind, I have never seen him left behind.

Now listen, I don’t want to suggest that I think that I am on board, I haven’t bought any, I wish I had of course, but I do think something big is happening here.  This is significant.

It is, I don’t doubt that and…

And the other thing to say is that it is not ever going to – even if it is a bubble it’s never going to go back to zero.  I mean something has changed permanently, it isn’t like a flash in the pan.

Well, what’s changed is that cryptocurrency has arrived.

Well, two things have changed, blockchain has arrived and separately cryptocurrencies have arrived.

Yeah.

Cryptocurrencies are going to become a part of our world.

But they’re going to become a part of our world when they’re legitimised by the financial institutions that we trust.

Well, sure.  But, I interviewed Gemma Green this week who runs a business in Perth called PowerLedger, which is a blockchain based power trading platform for people who have solar panels on their roof.  They issued some cryptocurrencies called POWRs.  Now, they were issued at 8 cents each three months ago, they’re now 80 cents each, these things.  Now, PowerLedger is a really significant company.  These things, these POWR tokens, they actually have a value because they represent a means of trading on their platform so it’s in a sense a presale of the service that they’re going to provide.

Yeah, it’s working as a measure of value.

And there are a lot of those kind of cryptocurrencies.  Bitcoin is getting all the publicity but there are a thousand other cryptocurrencies.

Yes, I know, and this is all very interesting but we’re looking at it as a trend and this week I think we have to say our BT Mega Trend, and we are sponsored, the podcast, by BT Financial Group.  Every week we pick a Mega Trend, but the Mega Trend is cryptocurrency.  I think the blockchain is all very well, and as you say I think it’ll take off.  I think cryptocurrencies are here to stay and they will be legitimised, and that’s all very well.  But, here’s the thing, people are rushing into this and it’s highly volatile and it has no regulation, and there’s going to be some end in tears.

Well, there probably will be, as we started off saying, there will be a rush out of them at some point.

Yes.

At some point there will be a period when there are all sellers and no buyers of this thing and the price will crash, probably.  But, what will it get in the meantime, no ideas.

No one knows, pick a number.  100,000 – nothing is out of line, is it?  Nothing is out of line.

No, that’s right.

When you think about what happened with the dotcoms and I suppose it’s our only parallel really, but the dotcoms were extraordinary because you had companies that were entirely built on promise and the promise did come true.

Part of the reason, I think, that everyone is kind of excited and interested in it is because the share market is so boring at the moment.

Yeah, that’s a very valid point.  The Australian share market is still below where it was 10 years ago for a start and we have this thing where the volatility is at its record low in many markets and people are craving something to trade.

Yeah.

But you can trade on the stock market, why don’t you do that.

You’re just as likely to lose money on the stock market as you are in bloody cryptocurrencies.

Yeah, that’s right, that’s what I’m saying.  But, if someone says wow, Bitcoin is up 50% since October…

I thought you were going to say since yesterday, which is kind of…

Well, the numbers move around.  On Wednesday afternoon it was up 50% since October but you can pick a handful of stocks any day that will go up 50% if you want to play.  Maybe the attraction is that people are uncomfortable and find the stock market very complicated and actually prefer this method.  Bitcoin is interesting or at least it’s simple, but people aren’t sure of the stock market and go into Bitcoin.

Yeah.

I mean, I don’t think they’re the same people that are in the market, that’s the point I’m making.  I think it’s bringing in people that don’t invest per se, they’re speculating.

Yeah, well they’ll probably – when they go away they’ll probably never come back because they’ll be burnt.  Anyway.  Now, do you want to do the question now, James?

No, there was one other subject I want to bring up, Alan, before we do the questions.  It hinges off your quite dramatic statement last week that if you want – what was it?  If you want to find a good investment find a company that has a woman CFO.  That was remarked upon by many in the days that followed.  If you remember I was speechless at the time, I was very shy of wandering into that particular debate for the simple reason that I think men and women are equal.  I don’t think women CFOs are better or worse than men.

Men and women, if I may say, are definitely equal but they are also different.  It is possible to be equal and different, it is.

So, our former colleague, James Frost, who worked with us in the early golden days of Eureka Report, is now on The Financial Review.  He saw this and he had a bit of fun because Aurora Funds Management during the week has a CFO and she, Betty Poon, was fired in the middle of all sorts of chaos at that group.

Well, I’m afraid that – I mean I don’t know what happened to Betty Poon and why she got fired but leaving that aside I would imagine that female CFOs are not immune from being incompetent.  I’m not suggesting for a moment that no female CFO is hopelessly incompetent, so it’s entirely possible is what I’m saying.

Are you saying there are good ones and bad ones?

Could be.

Did you notice what happened with – talking about a good one, did you notice Fortescue today?

Yeah, you were telling me before that they…

Elizabeth Gaines, she’s got the big job.

Elizabeth Gaines is now the CEO.  So, now you have to sell Fortescue because they haven’t got a female CFO anymore.  Just kidding.

I didn’t think of that.  But, way back, folks, in August we mentioned that this woman, Elizabeth Gaines, at the time CFO of Fortescue, had put an enormous amount of money on the table.  Half a million dollars of her own cash and she bought Fortescue shares.

What price, do you know?

Good point, I do know, yeah.  About $6.

$6, she’s down.

She’s down, they’re about $4.50 or so today.  So, she is down.

Yeah, ouch.

Yes, but now she’s the CEO.

Well, she’s highly incentivised.

She’s in the driving seat to get her money back.  So, yet another interesting and intriguing development at Fortescue.

What I’d love to do now is get a list of the companies on the ASX with a female CFO and it’s not easy because you’ve got to go through, there’s no, at least not that I’m aware of.

You can get someone to do it for us.

Yeah I know, but who?

I don’t know, well we’ll put there, we’ll put it out there as a challenge, folks. 

Come on, somebody – does anyone know of a list of CFOs?

I’m being honest about it, it won’t be very hard because there isn’t that many.

No, but you need to have a list of all of the CFOs and pick out the women.

I know, yeah.  What will we say, top 200, will that do?

Well, yeah I guess to start with.

Okay, well there it is.  Now, talking about interactivity with our audience we have a question, Alan, from somebody signed as Frasam.  Frasam says I’m on a Disability Pension and I have inherited enough money to purchase property.  I’m concerned though the market may fall.  Your colleague at The Australian, Robert – that would be Robert Gottliebsen no doubt, is the latest prophet of doom regarding the property market.  So, is Robert right or is he just a grumpy old man?  That, by the way, is a verbatim quote.

Well, possibly both.  Actually, no, Robert’s not grumpy at all, he’s one of the happiest and sunniest 75 year-olds I know.

He’s a very sunny happy person, though often very gloomy in his prognostications.

Well, mainly when Essendon loses it must be said.

Yes, and also on the markets.

And also when he gets off the phone to Harry Triguboff which is reasonably frequently.

Well, Harry Triguboff would never be gloomy on the market, he’s the biggest apartment owner in Sydney.  He gets gloomy that he doesn’t get his way, perhaps.

Well, I think Harry is probably – well Harry is not a young man either, he’s in his 80s and I suppose he probably suffers a few health problems so he probably gets up some mornings feeling very grumpy, gets on the phone to Bob and says how terrible everything is.  Bob then bashes out a piece for The Australian about how terrible everything is.

Yes, but you haven’t answered the question.  The question was is he right or wrong on his gloom on the property market?

So, Frasam, the answer is there is no one property market.  You would not buy – there’s no way you’d buy, or should buy, an apartment in Sydney or Brisbane, or Melbourne for that matter, now.  Sydney houses in general are on the way down at the moment and I…

Yeah, they’re falling by the month.

And I think it’ll be a long time before Sydney house prices start to go up.  So, I don’t know where you are, Frasam, and everyone is more inclined to be properties in the cities where they live.  So, if you lived in Sydney you’d be inclined to buy one there but that wouldn’t be a good idea.  Melbourne prices are still rising but I think the peak is not far away.  So, in terms of the east coast of Australia this is not a good time to be buying real estate, that is true.  I’m not saying that the market is going to crash, I just think that the returns over the next five years won’t be that great and possibly negative.

It could be a buyers’ market pretty soon and could be even better in six months’ time.

Yes, but not immediately, I think it could be a couple of years before prices bottom.  So, however Perth prices have been falling and quite a lot.  So, probably you’d say that Perth prices are about to rise so that’d be a good place to buy.

I’d say Perth is the best city in Australia for an investor in property in the next five years.

It’s probably Perth.

We don’t know where it’s going to go but it’ll be the best because it’s had a serious sell off already.

And the best rises this year so far have been in Hobart.  So, it’s already kind of moving quite strongly in Hobart and I suspect will continue to do so.  So, it depends a bit on how adventurous you are, Frasam, as to whether you are inclined to buy in Hobart and Perth.  But, in general it’s very difficult to talk about property as a whole because each market is so distinct.

It’s very true and I would add to that, Frasam, if you are an investor you have that freedom to do so.  The difference between owning a property in the city you live and not being in the city you live, having a property in another city, is not that great.  You can get all the data quite easily and you can…

Well, you own real estate somewhere else, don’t you?

Yeah, I do, in another state.  It’s no different than having something in the same state, it’s really no different at all.

And you used to take your holidays, you used to get some tax deductible holidays I think, didn’t you?

Yeah, that’s why I haven’t been there, that’s why I don’t get up there anymore.  Alright, well we might leave it there for today.  Thank you very much everybody.  Don’t forget you can subscribe to The Money Café on Apple Podcasts or your app of choice and if you’re there please leave a review.  We’ve been getting reviews and we’re absolutely delighted to see those reviews, please add to them and if you want to entertain yourself you can read them.  Also, send in a question, more questions, we’d love to have a couple of questions every week and we’ll answer them.  So, e-mail us on hello@theconstantinvestor.com.  Until next week I’m James Kirby, Wealth Editor of The Australian.

And I’m Alan Kohler, publisher of The Constant Investor.

Thank you very much, see you next week.