CBA's profit soars… and shares sink

Well, it's been a helluva busy week. Here are my Friday afternoon reflections…

What do you do if you're invited to a dog-and-pony show?

RBA Governor Philip Lowe has had to front not one, but two, parliamentary committees, each keen, on the surface, to get more information about the current monetary policy settings.

On the surface? Well, there's been just a little grandstanding, too.

How much?

Well, the pollies have taken it upon themselves to express their displeasure about where we are, how we got here, and what might happen next.

Though none of them, as far as I know, have run a central bank before.

And none of them, as far as I know, has moved even an inch to make some changes to fiscal policy that might take the pressure off interest rates.

Maybe it's just easier to point fingers and get your mug on the telly for a few seconds, demonstrating that you're the battlers' friend, and that mean Mr Lowe is responsible, and hopefully we'll remember that at the next election.

Too cynical?

Perhaps.

And some have, commendably, asked good questions, seeking to understand, rather than to grandstand.

And yet.

And yet my criticism – that fiscal policy (that's government taxation and spending for those of us who didn't do economics at high school) has been MIA – remains 100% unequivocal.

My solution? Thanks for asking.

Here's what I wrote on Twitter during the week:

Politics aside, good governance, inflation-wise, probably includes:

That's… not what we have.

And I followed up with:

And housing policy probably includes:

— Integrated population, environment, transport, broadband and planning policies

It seemed to go down well.

Except with the pollies. No movement there.

Yet.

Stop asking for specifics

Speaking of Governor Lowe, the politicians keep asking him for predictions.

Now maybe that's not silly – the RBA was forthcoming with their prediction that the preconditions for rate rises wouldn't be present until 2024.

That… didn't age well.

And I guess if you have someone who has given predictions in the past, you might as well ask them for an updated version.

So the pollies want to know how many rate rises will come.

What will happen to prices.

What the RBA is expecting the impact would be.

As I said, given the RBA has made predictions in the past, the pollies are well within their rights to ask.

But the politicians, the RBA, economists, journos and plenty of the rest of us are barking up the wrong tree.

Why?

I just told you (sort of) – he was so spectacularly wrong last time!

Not because he's hopeless – but because forecasting is somewhere between really, really hard and impossible.

And much closer to the latter.

There are a million things that could happen over the next six months that would mean any prediction, given today, would not come to pass.

That's exactly what happened last time.

The RBA should know better than to give forecasts.

The pollies should know better than to ask.

And the rest of us should know better than to listen.

It's not just the RBA, either. Company CEOs do it. Some financial analysts do it.

Because we all like the feeling of certainty.

It's hard-wired into us.

But, if we don't stop, all we'll get is a combination of a little luck and a lot of disappointment.

And a lot of time, effort and emotion, wasted in the process.

The market doing what the market does

It's almost easy to forget we're also in the middle of earnings season.

Well, except when share prices bounce around like a 3yr old with a key to the cordial cupboard.

This week?

Commonwealth Bank of Australia's (ASX: CBA) profit was up 9%. So…. the shares fell 5.7%.

Corporate Travel Management Group Ltd (ASX: CTD) (I own shares) forecast a return to record profit. So… shares fell more than 8%, after being up 3% in early trade.

Then jumped 10% the next day.

And that's just the Cs.

The 'smart money' at work, huh?

And don't get me started on 'Company X missed estimates'. It should instead read 'Analyst forecasts were wrong for Company X's profit'.

But it's easier to blame the company…

(Corporate Travel is up another 5% at the time of writing, today. More gyrations.)

Quick takes

Overblown: As above, the sense that a central bank governor, with one single, solitary lever, can overcome generational inflation without causing collateral damage, while fiscal policy whistles (and, worst, we have a structural budget deficit) grossly misunderstands the way our economy works. Yes, Lowe has made mistakes. And this 'medicine' hurts. But we're focussing on the wrong thing.

Underappreciated: The headlines are 75% interest rates, 15% artificial intelligence and 10% corporate scandals at the moment. Each will have a small impact on long-term value creation on the ASX. But the more important stories are the quality companies whose CEOs are just getting on with maximising long term value, day after day, by understanding their business and finding incremental opportunities to improve. The headlines will fade. Quality endures.

Fascinating: The surge of AI is incredible. Really, really impressive. But how will it play out? The 'internet' is incredible, but it became a (very valuable!) feature, rather than a product in itself. Very few 'internet' companies (think hardware or cabling) made huge profits, but lots of businesses used the internet to improve costs, reach, scale and lots more. Hard to know how AI will revolutionise business, but I'd bet it makes its mark.

Where I've been looking: Everywhere! Earnings season is like that – drinking through a firehose. We're keeping an eye on our active recommendations, as they release results, as well as looking for interesting opportunities thrown up by unexpected results, or by market reactions. Overall, I've been really happy with the (business) performance of our companies!

Quote: "You must do deep research to build a high-conviction non-consensus view. Remember that to generate excess returns (above-market returns) you must be non-consensus and right…" – My US-based colleague, John Rotonti Jr.

Fool on!