Big Picture
It has been a while – we have had three UK Prime Ministers since the last update.
Serious case of writers block – but I will try to unpick the bits that piqued my interest over the last month.
The UK experience is amusing. We love to stick it to the Olde Country whenever we can, but now more than ever she needs to be strong. Instead it is fast becoming a basket case. Those that espoused the value of Brexit and taking Britain back to it’s glorious past have now largely disappeared into the shadows and just the wreckage is left behind.
The power of the market was in full display though. The bond and FX market punished the (ex) PM for the ill-conceived tax cuts and she never recovered. Already Rishi Sunak is rumoured to be under the pump.
Not far from Rishi to Ricky…:
Putin appears to be losing both on the field of battle and the battle of hearts and minds. Russian balance of payment surplus is surging however as gas and commodity exports enjoy huge price lifts. Sanctions appear to be failing to my eye.
And Xi is no doubt still looking on with more than a casual interest. He seems to have given up any pretext of trying to appease Western civilities. Those in favour…say aye…or die…
Apart from the lack of social pretence, China is also massively cutting back on provision of economic statistics.
The chart below shows some 75% decline in publishing economic data.
Yet the Chinese share market had a super bullish week on rumours that it may cut back on its zero Covid policy – and thus see a possible boom ahead. Maybe so, but as I often say…anyone that says they really know what is happening in China is either a fool or a liar.
There is also a feeling (hope) that the US share market is near the bottom, especially as the Federal Reserve is set to pivot to a softer monetary policy.
Two US charts that interested me.
The first is a positive (of sorts).
The market rightly pays a premium over government risk when it buys corporate debt. The chart below is the spread between US 10 year bonds and Baa rated corporate debt (i.e. above junk rated).
The spread bashed out to 6% in the worst of the GFC but is tracking historically low at circa 2.25% at present.
If the market expected anything to go balls up shortly, this would be a lot higher. All calm, and all good.
The second US chart is less charming.
We read a lot early this year that households had balance sheets in good shape and savings were sky high.
This was true – but no more. Savings are at six year lows, and credit card spending at six year highs.
To me this is maybe showing that US consumers are trying to live a lifestyle that they can no longer afford – and certainly not helped by high inflation. This is not a sustainable chart for long.
So a great time to buy the dip? It clearly didn’t work for this would be Jordon Belfort (aka the Wolf)
I know a number of my finance mates are fans of US stock picker Jim Cramer. He is full on showman. Problem is that often his picks go pear shaped.
Tuttle Capital has opened up an “Inverse Cramer EFT” fund. In other words, they do the exact opposite of what he suggests. So far it is hummin’.
Of course crusty old knobs like the Swan say, even a pivot (which seems a long way away) does not guarantee a boom in the share market. The chart below highlights how the last two recessions (Covid excluded) saw the share market fall significantly (red line) even as the Fed was cutting rates (blue line).
May be best explained by consumers confidence getting battered and corporate profits squeezed.
I reckon you can overlay that same theory here. ABC’s Kohler has strapped together the composite of time and quantum of the last three ASX pullbacks. On that basis we may have a long way to go.
I doubt that however…and past performance is no guarantee of future outcomes (albeit I believe in mean reversion theory).
The market in most western economies are planning hikes into early 2023 then the magical easing. As Billy Joel says, you may be right, you may be wrong.
Meanwhile in Europe…
Domestic Duties
RBA hiked to 2.85% as expected.
They also said a bit for the bears and the bulls.
Signs they may slow the pace of hikes, but without commitment.
They also said two keys things to my ear:
- Inflation will stay above the preferred band until at least the end of 2024 (2 years away).
- The magic pudding “neutral” cash rate where the economy is neither getting too hot or too cold is believed to be circa 1%… in real terms.
Real terms means after inflation – which is expected to peak at 8%.
So no one really expects RBA to get cash rates to 7%. They will “look through” the peak. But it seems highly likely/possible that inflation will average at least 4% over the next two years. Which to my simple arithmetic should see a cash rate averaging around 3% till late 2025 or early 2026.
Of course RBA will by half design and by half mistake, overcook the rate hikes to crush inflation.
The markets are pricing a possible cash rate of 4.15%. That seems a bit toppy, but rarely do the big banks have such a divergent cash rate forecast, CBA sees one more 25 bp hike in Dec to a peak of 3.10%. ANZ sees a peak of 3.85%. In policy terms that is a big difference.
For what it is worth, I predict a 25bp hike in December and another in February, then a pause at 3.35% while RBA review the lag effect on spending and inflation. If no pullback on either then they will keep going – with a big figure 4 not all together impossible.
If that happens:
Consumer confidence is shot to pieces – at levels not seen since the start of the GFC and Covid.
Not surprisingly, mortgage holders are the most pessimistic.
So you would think most consumers would be battering down the hatches? The RBA would not be happy with Retail Spending though. The whole point of monetary policy tightening is to get people to refrain from the cash splash.
Like the USA we seem to be incapable of not spending.
Business confidence is holding up much better than consumers.
Trading businesses appear to be doing it the best, and it appears that profitability is holding up ok – they seem to have broken the shackles of pricing restraint and able to pass on higher costs to consumers.
Of course, maybe businesses are just happy given the return from input from workers and owners appears well skewed.
Finding skilled staff remains a key challenge. Bizarrely it appears paying more seems a concept too far.
CBA data:
Banks
NAB and Westpac reported cash profit results within expectations – but both lost share value.
Investors are torn between the two triggers:
- Increased rates allow a higher Net Interest Margin, which equals better profit
- Increased rates see expectations of a fall in credit requests from home buyers and businesses – which equals less profit.
To me, the first is baked in, whilst the second is a possibility , but not yet a certainty. Maybe value?
Meanwhile legacy issue over bank proprietary continues. NAB has been found by a Federal Court to have engaged in unconscionable conduct with over-charging periodical payment fees. Fine yet to be fixed.
ANZ had similar fee issues – dating back 20 years!! Court has charged them $25m and it is estimated that another $211M in remediation is payable. The issue seems to be on fee waivers and their “Break-free Package”, which turns out to be broken fee.
Leopards and their spots.
The Aussie Dollar and Commodities
A great base line article explaining what happens when the Aussie dollar is weak (or the US dollar is strong) was in the AFR this week. AFR – Strong USD
The AUD has lost circa 13% of its value this year against the USD – but has strengthened against other currencies.
We trade circa 50% of imports in USD terms – and more than that in exports.
Of course miners love a weak AUD – means more in their pocket for the same tonne of stuff.
Pundits believe the real value of the AUD in trade terms should be 75 cents as against the current .6430.
The stronger USD story may be finally coming to an end. The AUD may have some upside in the next few months. I’m thinking 68 cents at least by Xmas.
A lot of chatter about Australian mining operations gearing up at present – particularly in iron ore. Strange if China is really about to slow down. Maybe they know something.
Of course at a distance, I wonder why we can bang our drums about the military threat in the Asian region from China, yet we are more than keen to keep shipping raw materials to them to build military capabilities. The old argument of “well if we don’t, some one else will” would probably be dragged out again.
Politics
Who remembers the “Truth” – newspaper most poorly named. Mind you, current Murdoch press is not that much better.
I found this front page from 1987. I had forgotten he had a heart attack at Rushcutters Bay Travel-lodge on the day that John Howard launched his campaign bid. Billy was meeting with his son’s ex girlfriend. Scandals do seem to haunt Attorney Generals.
Of course the big politics is happening in the US mid-term elections. Looks like a repudiation of Trump (and maybe Biden). Hopefully this will ensure no 2024 Series II of Lunacy in the White House.
Victorian election is getting nasty. From a distance I would say neither major party deserves to win.
Various inquiries and reviews seem that Federal Labor want to maximise Coalition pain. Robo-debt, secret ministries and Shooter McKenzie’s sports rorts all make the past government look bad. Nest lining was clearly rampant.
That said, Labor need to govern. The public have already decided on the past lot.
Now what to do with those pesky Stage 3 tax cuts. I see a few meetings like this one…:
Housing
This chart is from the UK, but I strongly suspect that it applies equally here.
Point being that current lending standards are a lot higher than pre GFC.
Chances of mass defaults are thus minimal.
Interesting side fact – nearly 5% of Aussie GDP growth from 2021 was made up from spending generated from Home Equity Withdrawals.
A side fact to that side fact…
- 1975-2022 US home values increased 913.13%
- 1975-2022 Sydney home values increased 3661.18%
Why wouldn’t you spend like a drunken sailor when your home just prints money for you. I wonder how that will go if prices actually fall for some time.
Chart below is RBA predictions for house prices. Blue was its previous and pink (purple?) is the updated view post November meeting. Some consider it amazing that they were embarking on the fastest rate hiking cycle since 1992 yet until this month so little chance of significant house price falls. Were they dumb or hopeful?
Crypto and Gold Land
The Wall Street Journal put out a front page story in October stating that gold was finished as a safe haven commodity. It was falling and looked like going through $1,600 USD an ounce. Now over $1,700 that call is not looking flash. Of course much of that gain comes from a fall in the US dollar strength.
Bigger news in crypto land. I know many readers are only casual observers, but a USD $100 billion fall in value is worth looking at.
Summary first…. As a business if you think you have sufficient liquidity buffers, often you don’t. Especially for those Black Swan events.
Not the biggest, but a large crypto exchange FTX had a few bad weeks, not helped by its biggest rival Binance trying to right roger it. Reports of US investigations of mishandled funds and massive withdrawals saw FTX hit a liquidity crunch. FTX’s head honcho was pro regulation. Binance is anti regulation.
Binance originally seemed keen to bail out FTX via a merger (take-over), but this has fallen through.
FTX was worth $32B early this year. Now worth stuff all. Interestingly, a lot of that previous value was created when FTX bought out struggling exchanges in the last big shake-out. Big fish eat little fish until they choke.
Anyhow, the domino effect has hit all parts of crypto. Across the board all are down about 66% in the last 12 months.
Bitcoin at USD sub $16k is 77% down from it’s $68k level last year. You don’t need a chart for that.
Should you buy or sell?
I suspect if you own already, then you are a holder.
I equally suspect there are not many readers with big enough wallets or kahunas to buy in just now.
As a final side issue, a Singapore based exchange ADDX, is releasing a $1m portfolio of NFT’s backed by vintage wine. I like the underlying asset, but their timing seems poor. Maybe to drown your sorrows?
ESG and Carbon
US is becoming a major gas exporter. The Federal Reserve of Dallas did a survey recently on expectations for US LNG prices in coming years. 69% of executives believe that cheap gas with not be available by the end of 2025. Could this be due to a switch to renewables?
It would appear however that this is because executives see that as the US exports more LNG the domestic market will pay the international price. No big deal of course, but very interesting when overlaying the current Australian experience as a massive exporter, but without domestic benefit (WA excepted).
My simplistic view is that it is our gas and we should be getting some benefit – stuff sovereign risk, bring on price caps to those bastards.
COP27 is under way, but not getting as much attention as previous COP’s. A sign?
What is clear is that emission targets will not be met unless China buys into that dream. I’m no fan of Xi, but as pointed out previously, they already are doing some heavy lifting. Not for the better world good I suspect, but because their citizens demand clean air to breath.
Sales of EV’s in China are up a staggering 75% in October, and China is on track to sell 6.5 MILLION EV’s in 2022.
My only regret was not buying more lithium stocks last year.
Drinking favourite…
I had the rare enjoyment of sharing a degustation meal in one of Australia’s best wine regions recently.
We got to sample a truck load of different wines.
One that stood out for me was a Shut the Gate negroamaro. Dangerous name, but great wine.
$35 from the winery, but we paid double that at the restaurant, but value is in the mouth of the drinker.
They say “A rarer southern Italian variety worth seeking out. A stylish version of this ancient Italian. Just the perfect pasta wine. Beguiling scents and layers of flavours with firm granular tannins. Soft full fruits with that “cola” fruit sweetness coming through. Lovely sour cherries with a hint of fruit compote sweetness. Some hints of black olives give the wine some base notes. Fine but firm tannins cradle the fruit and a little tingle of acidity keeps the package fresh.”
9/10
Whilst on product push…
I went to a book launch recently. The author is Evan Lucas who attacks finance from a psychology perspective overlaid with macro views. Bought the book and still working through it. His own review:
Listening to…
A new release and a cover of an oldie that I always enjoyed.
Feedback always appreciated…
If you want to write a piece – long or short, drop us a DM.
(written down by Black Swan)
Cheers, BS
