Hedge funds have placed an $11 billion short against Australia's big four banks. That is not a small, speculative punt. These are some of the most sophisticated investors in the world, people with access to information and analysis the average Australian simply does not have. When they put that kind of money behind a bet against banks that have gone almost straight up since 2009, it is worth paying attention.

I think this trade is not random. It is a direct consequence of the negative gearing changes in the recent federal budget, and it tells you something important about where the financial system is heading.

The Negative Gearing Domino Effect

The removal of negative gearing has stripped away a major incentive for Australians to invest in property. Fewer people taking out investment loans means fewer mortgages on the books, and mortgages are how banks make their money. Add rising interest rates into the mix and you get a double hit on borrowing capacity at exactly the same time.

We are already seeing the strain show up in unexpected places. Since rates started climbing, there has been a threefold increase in people lying on their home loan applications just to get approved. That is not a healthy sign. It points to smaller loans, fewer loans, and a lot less debt flowing through to the banks. Less debt means less profit, and the banks know it.

What the Mortgage Stress Data Shows

A recent AMP report on mortgage stress lays out three things to watch: negative equity, delinquency rates, and the share of income going toward repayments. Australia already has the highest household debt to income ratio in the developed world, which makes us more exposed than most countries to even small moves in prices or rates.

That exposure matters right now because property prices are expected to fall five to ten percent over the next year, with further softness from there. A lot of recent buyers, particularly those who used the government's five percent deposit scheme, are going to find themselves underwater. Delinquencies are still low today, but the report flags that further increases are likely as prices fall and higher rates put more pressure on repayments. Household interest costs as a share of income bottomed out at 4.4 percent in March 2022 and have already climbed to around seven percent, with the full effect still working its way through the system given the typical three month lag after the RBA moves.

Lessons From the GFC

We have seen this movie before. Between October 2007 and early 2009, Commonwealth Bank's share price fell more than 60 percent, from over $60 down to $23. If something similar plays out again, the hedge funds holding this short will do very well. Everyday Australians will not.

This is the part people miss. It is not just property investors who are exposed here. Retirees who hold bank shares for the dividend yield get hit hardest in a scenario like this. Even if you have never bought a bank share in your life, your industry super fund almost certainly holds them, and we have seen super balances drop 20 to 30 percent during past downturns. The negative gearing changes are not just a property story. They are a bank shareholder story too, and most Australians are exposed to that whether they realise it or not.

The Collapse Scenario and the Counterparty Risk Problem

There is a more extreme scenario worth thinking through, even if it is less likely: an actual bank collapse. Australia has a federal deposit guarantee covering the first $250,000 per account, which sounds reassuring until you ask how a government already running deep deficits would actually fund that guarantee at scale across the entire banking system. The only real lever available is the printing press.

That is the problem with relying on a guarantee denominated in a currency that can be created at will. If that scenario ever played out, the dollars you got back would not hold anything like the purchasing power they have today. This is exactly why I think about precious metals the way I do. When you hold physical gold or silver, you are not relying on a bank, a guarantee scheme, or a government's ability to make good on a promise. You own the asset outright, with zero counterparty risk attached to it.

My Take

None of this means the banks are guaranteed to collapse or even guaranteed to fall sharply. What it does tell me is that some of the smartest money in the country is positioning for real stress in a system most people still treat as untouchable. That is enough for me to keep doing what I have been doing for a long time now, which is holding physical metals as the part of my wealth that does not depend on anyone else's solvency.

This is not financial advice. It is simply what I am seeing in the data and how I am positioning my own money in response to it.

What a time to be alive.
Sam from Liberty Bullion