Finance Market Update – 11 September 20
We know the bad news is that we are in a recession, the good news is that it could be over soon with a recovery in property prices leading the way. In this fortnights update we cover that and talk about the devolution of banks.
Making it official
You would have heard by now that the Australian economy has experienced the first technical recession in almost three decades.
That is the bad news, the good news is that it might be over soon, sort of.
When it comes to recessions there are two elements that make it worrying. The first is high unemployment and the other is inflation. Australia, and indeed most of the developed world are far away from inflation issues, though if and when inflation does arrive the consequences for the value of money and other assets classes could be fundamentally shaken.
So, for now we will focus on the bad news unemployment before getting to the good news.
Right now, we have unemployment officially around 7% with it expected to peak around 10%.
In reality it is probably close to double that because the JobKeeper government employment subsidy program is keeping around 1.2 million people technically employed, so as it starts to taper off unemployment will likely start to rise as (zombie) businesses that were kept open from the government money start to close.
Even still at 7% it is extremely high and scary.
One of the scary things about that number is that it masks the many stories people are living today. Stories of losing jobs because the government told their employer they had to lockdown, or they owned their own small business which shut its doors, or myriad other reasons. Many of them have a similar theme, they do not know when things will get back to normal.
Embedded in those stories is a stark reality that things take a long time to recover.
In the previous three recessions in Australia and the GFC it took between three to ten years for the unemployment rate to get back to pre-recession levels.
This means that it could be ten years before that 7% rate is back down to around the 4% target of the RBA. An entire decade to get people back into jobs, or more accurately for the same amount of jobs to exist to be taken.
But there is good news.
The housing market is recovering and will likely lead the economic recovery.
After reading that I imagine you are thinking - Huh?
How can house prices be recovering or even going up when people are losing jobs and the economy is in recession?
The short simple answer is because of cost and emotions. Specifically, the low cost of home loan interest rates and the demand and desires from people to profit and own property.
The longer more complicated reason has something to do with the five forces fighting for a boom in property prices.
In line with my prediction that we will see a boom in property prices next year Australia’s largest bank CBA has revised their forecast and said property prices in Sydney will be up by 2.9% by the end of 2021.
That is quite the reversal in forecast from their 10% to 30% drop.
On top of that the Australian Bureau of Statistics just released data that the growth in new home loans being taken our jumped over 10% in the middle of this year when restrictions started to ease. That growth is about the same pace as after the GFC and when our economy started to bounce back and shows signs that as the property market recovers so should other aspects of the economy.
Hopefully that recovery includes new jobs and no new waves of infections.
Big banks are devolving
What you know as a bank today will not be what a bank is or does in ten years.
One of the big changes in big banks over the past couple of years is their exit from the wealth management industry and as they try to “refine the business model” to focus on “core” banking services.
This is a broad admission from the industry that the integration of different financial products does not always make sense and the trend of banks “unbundling” parts of themselves could continue.
When you look at the new age neo tech focused banks that have started over the past couple of years you can see a focus on customer experience and having amazing apps and services.
We also have seen Apple launch a credit card and move into being a financial services player and we will likely soon see Facebook and Google make similar moves.
All of these moves of new banks being tech led or tech companies moving into financial services signals a fundamental threat and change to the future of what a ‘classical’ bank is and does.
In the future the war for your money will be fought on your phone.
This is what makes tech companies such a threat to banks, they are more prominent part of your phone itself and the apps so they can get to your pocket first.
They own your experience.
This makes banks secondary or more precisely the services they offer are just a by product of what you actually want to achieve, and the apps and tech will be what you engage with.
A simple example of this is using your phone to pay for things with tap and go.
That feature bypasses the banking app completely and you only interact with your phone and features, not really the banks. The phone is owning your banking experience and the banks are behind the scenes.
This could happen to other parts of the banks.
Westpac and other banks are exploring ‘banking-as-a-service’ which will see them basically rent out the banking license and services to other companies and apps. They will be actively being secondary to the other business that gives you the user experience. So, not only are banks under threat of being pushed into the background but in certain cases they are actively moving there themselves.
Further with open banking and AI we could see apps that automatically move your money to maximise returns with no regard for which bank the funds sit with, the app is your money manager and experience, where it sits is just in the background.
The devolution of banks could go so far as to see them become a sort of utility provider, one that simply owns and manages the pipes and rails that money is moved along but they lose the customer engagement piece.
Banks face the possibility of just becoming a background utility, like your electricity provider, and you just continue to use all the apps and appliances without thinking about them.