A must read for all investors

Those not subscribing to the largest hedge funds in the US would do well to heed the voices of Wall Street as to the Australian economy and in particular the banks which announced record profits.  The following interview piece, in respect of expat fund manager Matthew McLennan explains just why the banks are risky and with low capitalisation (amongst record high private sector debt levels):

Asked if he had invested in Australian banks, which are highly profitable by overseas standards, Mr McLennan said he was put off by the major banks’ lofty leverage, which averages 27 times their underlying equity capital, and their exposure to fickle wholesale bond markets. 

“We haven’t been investors in the Aussie major banks, because the raw equity-to-asset ratios . . . are lower than our comfort zone,” he said. 

While the banks have profited from a “fair amount of cumulative credit growth over the last generation” Mr McLennan said their “reserves-to-loan losses” appeared to be “pretty low in the scheme of things”. 

He warned the Australian economy, which was dubbed by The Economist magazine as the “wonder Down Under” for 22 years of uninterrupted growth, may soon start to struggle.(here).

More on those lofty banks here.