Monday, 30 January 2023 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

Goodbye January 2023 and thank you. It was far more fun than June 2022.

It was mid-2022 that the Aussie share market really began to panic over what high inflation would do to interest rates, and therefore company earnings in 2023.

And now here we are….and what have we learned?

Those darn Aussie consumers just keep confounding everyone. Yes, I’m talking about you!

The predictions were a spending recession. The complete opposite has happened. Retailers are booming!

We’ve seen enough earnings announcements to be sure on this.

I note very positive releases from JB Hi-Fi, Myer, Super Retail Group, Accent Group, and Michael Hill.

As ever, the question is whether those investors and traders that bought low, now cash in their chips.  

The assumption behind this move would be that the next set of results will be hit due to higher interest rates.

Many borrowers in the housing markets are still yet to roll off their fixed rate loans. But that’s not clear cut.

Employment in Australia is strong. Inflation takes up rates, but it also takes up wages. And there are other variables in play here too.

Shipping costs globally are now coming back down after spiking in 2022. The Aussie dollar is strengthening.

That’s important for many retailers because they source so much inventory overseas and incur costs in US dollars.

Your guess is as good as mine about what matters more. But the results from retailers also suggest the big fear over Aussie housing last year was misplaced too.

Consumers wouldn’t be spending big in shops if they were genuinely worried about defaulting on their mortgages.

And we know something else. Retail spending will go long before mortgage payments.

Why mention this?

One of the fears that drove the share market down last year was the idea that the finance sector would face higher defaults.

We haven’t seen that in the same way we haven’t seen retailers smashed either.

The question for the upcoming half-year announcements due in February is: where do these numbers now lie?  

Can banks rally even more from this?

It’s possible. ANZ, for example, currently trades on a 7% yield. The scope is there for it to move up from a valuation perspective.

Again, it’s the outlook that matters. The market is sceptical that there’s enough sector volume growth on offer with a weak housing market.

But what if housing starts to bottom out around here?

We know there’s record low vacancy rates. And we also know that Australia’s immigration intake could be a monster 300,000 this financial year.

These two ingredients alone are enough to start firing up the housing market again.

Now here’s the good news…

Property stocks are still, by and large, on the floor from the 2022 bear market. They haven’t rallied up in the same way as retailers recently, or miners.

But I don’t think it will be long before they begin to rumble.

The market is always looking nine months ahead. But occasionally, investors need to glance back as well.

They’ll realise they became too negative in 2022 and the stocks will price in a more moderate outcome.

We’re already seeing inklings of this in the commercial sector via Real Estate Investment Trusts (REITs).

Take this story from the Australian Financial Review (AFR) the other week:

‘Some big-name property stocks could bounce back strongly enough to deliver investors total returns of up to 15 per cent this year, a welcome recovery after rising rates caused havoc for real estate investment trusts last year…

‘With much of the pain priced into property already, and with the rate rising cycle expected to ease by mid-year, analysts are tipping strong gains in the sector, notwithstanding economic uncertainty.’

Personally, I picked up some exposure to REITs last year in my self-managed super fund on the assumption something like this would play out.

On the whole, I probably could’ve been more aggressive and bought into some of the other sectors with bigger potential for capital gains.

But hindsight is 20/20 and at the time I reasoned most of the damage had been inflicted on REITs despite them being fundamentally robust.

I didn’t know the market would recover as strongly as it has, or that iron ore would rally so strongly, either.

Now I see the same opportunity brewing in the housing sector. The market may already be sniffing this out.

One economist cited in the AFR today says he thinks the Reserve Bank of Australia will be the first central bank across the developed world to cut rates, and this year too…to take the pressure off the housing market.

I concur.

It’s just another reason that last week I allocated about $40,000 to one beaten-up lender as a starter.

I don’t plan to even think about selling for three years, at least. Housing moves in big swings. I’ll keep you posted on how it pans out.

But my favourite idea when it comes to housing is in my ‘Top Five Bargains’ report. That’s still available here. Don’t wait around!

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

Let’s slow down for a moment and take stock.

Investors are mostly bewildered but hoping that inflation has peaked, and the Fed will soon ease up. Easing up seems likely to us…but not decisive. There’s more to the story, which we’ll come to in a minute.

Consumer prices are still rising at an unacceptable rate. And workers — that’s most of us — are still losing ground. Wages are going up. But after inflation, we are poorer.

Meanwhile, real estate, where most people keep their wealth, is going down. We saw yesterday that house prices may fall 30% — in line with the last bear market in real estate. Many families only have ‘equity’ of 30%...or less…in their houses. So the expected drop will wipe out 100% of their accumulated wealth. And most likely, the Fed will continue its ‘tightening’, forcing those who need to refinance to pay higher rates (mortgage rates have already more than doubled since 2020).

Hypotheses, one and two…

We expect the Fed to continue its rate hikes until one of two things happen: A big bankruptcy, crash on Wall Street, or other financial emergency will cause the Fed to panic and ‘pivot’ towards lower rates. That is our hypothesis number one: that the Fed will continue to raise rates ‘until something breaks’.

But there’s another possibility, hypothesis number two: that the Fed will be forced to raise rates by the federal government. The Fed caused today’s inflation; it’s trying to redeem itself by getting it under control. But the elite who control the national government are still very much in spend, spend, spend mode. No cutting back for them. They have elections to win…battles to fight…claptrap to promote and boondoggles to finance. And they’re increasingly turning not just to spending money they don’t have…but also guaranteeing credits they can’t really afford.

Yes, the feds are running huge deficits. If everything goes well, you can expect another US$1 trillion shortfall this year. In case of recession — which is likely — the deficit will be much greater. But in addition, they’re steering private spending towards their favourite projects by offering an expanding system of tax breaks and credit guarantees. Homeowners are promised public money if they put solar panels on their roofs, for example, or insulation in their walls. Buyers are given credits if they purchase an EV. Young people are promised loans (later to be forgiven!) if they submit to further indoctrination, rather than finding a job where they might actually learn something useful.

The primary trend

This spending, direct and indirect, has to be covered. Meaningful tax hikes are out of the question. So the money has to come from borrowing or printing. Borrowing will drive up interest rates, thereby also increasing the cost of carrying the government’s US$31 trillion debt pile. Either way — borrowing or printing — the Fed will be forced to make low-cost funds available.

Thereby, one way or another, along comes the much anticipated ‘pivot’. And with it comes a new phase of the developing catastrophe, with the Fed supporting federal spending and the economy with lower rates, and probably more QE.

When this happens, many people will see a boom. Stocks are likely to go up. It’ll seem like an early spring thaw, with flowers coming up everywhere. Investors will remember how the Fed goosed up stocks after the dotcom crash…and again after the mortgage finance crisis…and again after the economy was shut down in the COVID Panic. They will think: ‘here we go again’.

But this time, it’ll probably turn out much differently. In our view, the primary trend is what counts. And the primary trend…

…for stocks…
…for bonds…
…for real estate…
…for the US empire…
…for the dollar-dominated currency system…
…for Western democracy…
…for Congress and the administration…
…for the economy…
…for standards of living…

…is down. That’s the ‘cluster’ we’ve been exploring when many things go wrong together. Night follows day. Bust follows boom. A young man becomes an old man. And a church warden sneaks into a brothel. You get the idea.

In ‘n’ outta whack

The primary trend is merely the process by which that which was out of whack gets back into whack…and then goes out of whack again. In the bond market, for example, we have seen only two major course reversals in our entire lives. Bonds fell in price from the late ‘40s until the early ‘80s. Then, the primary trend turned…and they rose for the next four decades. The second turn only happened in 2020, when they finally topped out, and yields (which go in the opposite direction) began to rise. Since then, the 10-year Treasury bond, the most common brick of the whole modern financial edifice, rose from barely one half of one percent in July 2020 to 3.7% — seven times as much.

We pay attention to the primary trend because 1) it is almost impossible to make any real money by trading in and out, trying to pick winners or anticipate the markets’ moves, 2) primary trend changes destroy fortunes as well as make them, and 3) when you invest in the primary trend you don’t have to pay so much attention to Wall Street.

We should probably add that the primary trend also brings us in contact with the ironies and disappointments of real life. ‘He that did ride so high doth lie so low’, we say, with the gravitas of a sage, after a crash. What goes up must come down. The last shall be first. The chambermaid will be queen. And the jerk, who gets elected to Congress, eventually gets what he has coming.

So many opportunities to say, ‘I told you so!’.

But wait…how can the ‘primary trend’ be down…and yet, after the Fed pivots, the economy may boom, and stocks may go up?

Stay tuned…

Regards,

Bill Bonner,
For The Daily Reckoning Australia