Get pumped for the 2023 stock market

Monday, 17 April 2023 — Albert Park

[5 min read]

Dear Reader,

Oh man, I’m pumped!

In more than 10 years as an analyst, I don’t think I have ever seen so many opportunities to allocate capital into shares with big upside and low downside risk.

Yes, I know. Likely, your portfolio has taken a battering since 2022. Your super fund balance is probably down from 2021. It’s been a tough 12–18 months.

But so much bad news has been hammered into the share market now it would take a second Great Recession to clobber many down even further.

And, to me, things are looking up!

Inflation is cooling. Rate rises are off the table, as far as the market is concerned.

Many of the sectors hit in 2022 — tech stocks, property, bonds, and Bitcoin [BTC] — are reversing.

Why?

Global liquidity is now growing again.

See this investment manager writing in the Australian Financial Review today:

‘The stresses and failures in the US regional banks sector are clearly an unintended consequence of Fed tightening. The central bank lifted rates until it broke something, and the regional banking system was one of the things I’d have really preferred them not to break.

‘Dysfunction in credit markets has historically been a key ingredient in broader dislocations and all data now shows that we are in the middle of a severe credit crunch in the US. This will result in a recession in short order.

‘As usual, the Fed has responded by flooding the system with massive liquidity, unfortunately with uncertain effectiveness. The Fed claims this is an idiosyncratic issue and that it still plans to tighten rates further, but the market knows the game is over, and the Fed will be cutting rates aggressively this year and next.’

I’m not so sure that a US recession is baked in. But I do think money is going to wash over the world’s asset markets.

Not only is the Fed bailing out the US banking system, but the Chinese authorities are also reflating their economy. Credit growth is growing.

And they have the plans in place to do what they usually do:

This is fascinating in the context of the iron ore market. It could rally higher against all previous expectations.

I must admit I was ready to buy non-WA iron ore stocks in a big way when I saw that big cyclone mustering over Port Hedland last week.

Who knows what might have happened to the price if any — or all — of the big three had their shipments or infrastructure disrupted or damaged.

That threat seems to have passed. But it’s highly probable Chinese stimulus takes iron ore up from here over the next quarter.

One wonders how high it might go. Now, of course, I could be misreading things here. However, the share market is all about risk and reward.

Considering how bearish everyone has become about the world economy, it only takes the news to be ‘less bad’ to get a rally.

And if things really start improving? We could be off to the races!

Now, this is where the housing market could be important. Clearance rates are lifting strongly. See this from the Australian Financial Review:

‘Auction clearance rates have jumped, hitting 72 per cent in Sydney, as listings doubled nationwide, with buyers taking heart from a pause in rate increases and signs the market has bottomed in the biggest markets.’

Here’s a very important point also cited in the same publication from ASX strategist Hasan Tevfik:

‘The strategist notes that during the past two tightening cycles, the end of the RBA’s rate rises preceded the bottoming of housing finance by around three to six months. Tevfik expects similar timing this cycle too.

‘Given the trough in housing finance typically coincides with the end of declining house prices, MST has declared it is no longer bearish on the Australian housing market.’

Personally, I’m keeping a sharp eye on finance related stocks here. The market will move on these long before it becomes apparent in the data.

All in all, the above is just a taste of why I’m excited for the market this year.

My latest issue for my small-cap advisory Australian Small-Cap Investigator contains a whole lot more…and two stocks I expect to roar as the bull market gets going.

I also put down five ideas in a special ‘bargain report’, available by clicking here.

One of them is already beginning to really lift now. The other four, in my view, won’t be far behind.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

Dear Reader,

What’s wrong with capitalism? What’s wrong with the US economy? Why isn’t it making people richer?

News flash from The Telegraph:

‘All Western economies are now facing the consequences of two decades of fundamental economic mistakes. Interest rates are the warning sign. They are far too low for a free market economy.’

Capitalism, left alone, generally makes people better off. If it’s more money they want, they work for it…and get it. If it’s more leisure that they really care about…they can get that too. More hula hoops? More Bud Light? More diversity officers? Well…that’s where the story becomes more complicated.

In a capitalist system, people get ‘money’ by providing goods and services to other people. Then, they use their money to ‘vote’ for what they want. Naturally, if it is rocking chairs they want…capitalists deliver them. The whole ‘system’, if you can call it that, intends to satisfy the wants and needs of ‘The People’.

Who wants what?

This is not to say that everyone gets what they want. People make mistakes. They make bad choices. They develop bad habits. So, what they actually get is not exactly what they want, but what they deserve.

But what about diversity officers? Who wants them? Why do we have them? Who votes for them?

It turns out that there are people who want you to spend money on what they want, rather than what you want.

Nobody wants a tax accountant. But the elite who run the government have made sure that you need one.

Who wanted to spend an estimated US$100,000 per household so the Pentagon could lose a 20-year war in the Middle East? Who wants to pay for an anti-drug policy that doesn’t work? Who wants to send money to Ukraine, where hundreds of millions are skimmed off by the corrupt elite? Who wants to pay for more regulators to tell them what to do?

And if you look at the entire federal budget — OMG, who wants that? This year, the feds will spend nearly US$6 trillion. So far, halfway into the year, which begins in October, the deficit has hit a record. From Fox: ‘Federal budget deficit hits $1.1 trillion in first half of fiscal 2023, $430 billion higher than last year’:

‘Government spending was 13% higher so far this year compared to 2022, while revenues dropped 3%, the CBO said.’

Incalculable costs

In other words, the feds are spending about US$5 for every US$4 in revenue. The excess gets remembered as debt, now almost US$32 trillion. That’s about US$400,000 per household, which will most likely get ‘paid’ in the form of consumer price inflation.

And what half-wit would want to save money and then lend it to a bank or the government at a lower rate than inflation? But that’s what everyone was forced to do for more than an entire decade. And even now, after more than a year of ‘going back to normal’, the inflation-adjusted key rate is still almost 2% below CPI.

This last point is an important one. Because the cost is incalculable. The price of money is the most important information in the whole system. And if it is distorted…and untrue…everything begins to warp and wobble.

The cost of money (interest rates) tells us where to invest…and where not to. If the interest rate is 5% a project must deliver 6% or 7% just to breakeven. Any less than that destroys capital.

But put the interest rate at NEGATIVE 2%...and where do you invest? You don’t know. Could you borrow money, buy gold, bury it in the ground and then just wait until you could repay your loan at pennies on the dollar? Maybe. Long-term investing requires faithful numbers. And all the numbers are fishy. Better to take the money now — in dividends…or higher stock prices. Or speculate — it costs nothing to borrow…so why not take a chance?

Gulag capitalism

The result is a fall-off in the kind of real investment that the economy needs. Production slumps. Productivity slides. Real growth and real prosperity disappear.

Adjusted for inflation, real wages just went down for the 24th month in a row.

Real GDP growth is only half the average of the 63 years from 1954 to 2017.

As we calculated last week, it now takes the average worker three times as much time on the job to buy the average house as it did in 1971.

And, oh yes…there’s a building boom going on. New houses are now being put up at the same rate as 1978. This is reported as good news, but now we have 100 million more people in the US than we did in the ’70s.

What’s wrong with capitalism? The answer is very simple: nothing.

Capitalism does its best. Even in Soviet Gulags, capitalism continued, as prisoners exchanged food and clothing. Wherever they are, people try to produce things that other people want…and to trade with them for the things they want.

The Fed’s phony interest rates did not stop capitalism. Nor did US$31 trillion federal debt — almost all of it squandered on wars, stimmies, and boondoggles. But they made it much harder for people to get what they really wanted.

Regards,

Bill Bonner,
For The Daily Reckoning Australia