Monday, 21 November 2022 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

Last week in the market was…kind of boring.

There was no follow-through from the big day the Friday before when the Aussie market jumped nearly 3%.

However, I picked up a few clues when it comes to Aussie housing!

One of those clues came via Aussie mortgage lender Resimac Group [ASX:RMC].

This is a quality business that I’ve followed for a long time.

Resimac came out last week with its trading update for the first half of the new financial year.

The news was flat at best. Its profit, though healthy, is down on the previous corresponding period.

No surprise there. Housing loans have cooled down from the 2020 boom.

What was interesting was the market’s reaction to the announcement. 

There wasn’t a sharp move down in the price.

Here’s what I mean…

When companies release a downgrade in earnings, it can often come as a surprise to the market.

When that happens, the response is lightning fast…and viciously to the downside.

However, what’s clear from the Resimac reaction is that the market has already priced in the housing slowdown into the stock.

Resimac is down 65% from its February 2021 high.

That’s an extraordinarily brutal sell down. The stock now trades on a Price-to-Earnings ratio of around four. That’s a level I did not imagine it would hit.

What’s also of interest is that RMC is angling to diversify its business into ‘asset finance’ as well as its current mortgage business.

That gives it a growth angle that, to me, looks unappreciated right now.

Asset finance, and business lending, in general, is quite strong in Australia at the moment.

Some other small-cap stocks that are involved in this market are Money3 Corporation [ASX:MNY] and Pepper Money [ASX:PPM].

Both are well down off their highs too.

What’s hanging over them is the outlook for interest rates.

However, my analysis suggests that this is now priced into a lot of rate-sensitive stocks.

Select real estate investment trusts (REITs) have been beaten up over the last 12 months and are also looking juicy too.

But aren’t rates destined to keep going up?

Not so fast…

Inflation could be cooling off already

Certainly, central bankers keep prattling on about rate rises.

The market says otherwise.

Here’s how we know…the yield on the 10-year Treasury bond in the US has gone down in the last few weeks.

It peaked over 4% in October.

It’s now around 3.82%.

Longer-term bonds contain information about inflation expectations and growth.

Right now, the market is pricing in less inflationary pressure and/or expected growth.

That brings us to crude oil too…

Brent crude, the global benchmark, has pulled back to US$87 a barrel.

That’s still pretty high. But theoretically, it should be rising into December.

Why so?

The cap on Russian oil is due to come in next month. Many believe this would drive crude oil back toward US$125 a barrel.

Something doesn’t square here considering the war in Ukraine remains unresolved and Russian oil could be off the radar for a lot longer.

The market also expects US strategic reserve sales to stop after the midterm elections. They may still do.

Why is crude oil going backwards?

Your guess is as good as mine…but I suspect higher interest rates are eating into demand.

For our purposes today, a weaker crude oil price keeps inflation and inflationary expectations in check.

What am I getting at?

The central banks are (arguably) getting it wrong again.

Just as they missed the inflationary outbreak, they’re likely guiding the Average Joe to expect higher rate rises than could eventuate.

That would mean many rate-sensitive stocks could be presenting a nice buying opportunity.

There are no guarantees with this line of thinking. But it’s a possibility.

I wonder, too, if this is what the gold sector is sniffing out. The gold stocks rallied hard the other week.

My Evolution Mining [ASX:EVN] and Regis Resources [ASX:RRL] stocks have held on to most of the gain so far too.

Less rate hikes are a tailwind for gold.

I know my colleague James Cooper sees opportunity here. James is a trained geologist and the latest edition to the team.

His new service, Diggers and Drillers, focuses exclusively on resources.

James just identified his favourite gold plays for his new readership. But there’s also opportunity across nickel, copper, lithium, rare earths…the list just goes on and on!

I urge you to join him. See what James is recommending by going here.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

News flash from Reuters:

‘Shares of Target Corp. tumbled 13.1% after the big-box retailer forecast a surprise drop in holiday quarter sales.’

While sales figures looked good for October, shoppers are having a hard time keeping up the pace. From Seeking Alpha:

‘Credit card balances rose by $38B during the quarter and 15% Y/Y, the largest boost in more than 20 years.’ 

Wages have been trailing inflation for 19 straight months. Diesel fuel — the stuff that powers our economy — is becoming scarce, with the average price at the pump up to US$5.35/gallon. Producer prices — as opposed to consumer prices — show a lot more inflation coming down the pike.

Retailers are wondering if Santa will come this year…

Slumlords elites

Our subject is the destruction of the US’s middle class. How? Why? Let’s look:

An incident from long ago…

Our first office in Baltimore was in a very down-at-the-heels neighbourhood. The building was a dump. But the city had offered to sell it to us for US$100.

As it turned out, we paid too much.

Not far away was the area known as ‘Lil’ Italy’, which was known for its good restaurants. It was also the safest part of the city; the Italians had baseball bats, and during the riots of 1968, for example, they stood guard. Nobody got hurt. No windows were broken in Lil’ Italy.

Between our office and Lil’ Italy was ‘housing projects’ — high rise horrors where ‘poor’ people lived. The area was so dangerous that even the cops locked their car doors when driving through.

One day, we decided to take the whole staff — about six people — to lunch in Lil’ Italy, which meant walking by ‘the projects’. While doing so, a police car suddenly pulled up.

‘What the hell do you think you’re doin’, said the cop, yelling through the open window. ‘You should know better. If anything happens to you, I’m going to call it a suicide.’

At least the Baltimore police still had a sense of humour back then.

But here is the backstory on ‘the projects’.

Blah-blah know-it-alls

One of the on-going conflicts of modern public life takes place between the know-it-all elites…and the middle-class, ‘common’ man. The know-it-alls are typically better educated, more media savvy, able to stand on a platform and give blah-blah answers to questions they know nothing about.

‘Baltimore was like the maternity ward for the American row house’, explained a friend yesterday. 

‘The row house was a great success…for the builders and for the families that lived in them. They didn’t take up much space…but they left people with space of their own…usually including a backyard where they could have a few vegetables, keep a few chickens…and have a backyard barbecue.

‘Then, along came the urban planners. They thought people — especially poor people — should live in high-rise tenements. So, in vast urban improvement campaigns, they tore down the row houses and put up big-box warrens for people to live in.’ 

How did that work out? Take a look. Here is what happened to the ‘projects’ near our office.

The Baltimore row house was where the middle class lived. The husband went to work in the factories and warehouses. The wife stayed at home…and scrubbed the white marble steps on the weekends. It was not a perfect set-up, but they were clean and safe…and what people wanted. And from the end of the Second World War to the 1970s…Baltimore’s middle class prospered. Wage earners sell their time, and time became more and more valuable.

But now, here in Charm City, the middle class has practically disappeared from the houses that once knew them. They’ve moved to the suburbs — largely to escape the crime and taxes of the city. The factories have mostly gone cold and silent too. In their places are high rise office towers, more or less emptied out in the COVID hysteria of 2020.

Elite planners always think they know best. Their victims? The middle class.

In business, they bring the latest business school BS. In government, they push whatever claptrap is trending in elite circles. And in the investment world…they pile on. Dotcoms…mortgage finance…ESG…cryptos — whatever the fad is, they’re on it, developing products that are sold to investors as the ‘next new thing’.

Thanks to their fake dollars — introduced in 1971 — real middle-class incomes peaked in 1975 and have been flat or falling ever since. Thanks to their wars — against drugs, poverty, Vietnam, Iraq, Afghanistan, Russia — thousands of middle-class young people have been killed, mutilated, or impoverished…and US$31 trillion was added to the national debt. And now, thanks to their inflation and energy policies, the American middle class may be doomed. Prices will rise. Incomes will lag even further. The poor will get more and more free stuff from the government. And the rich will find ways to protect their wealth…and even grow richer (when the Fed begins pumping out money again, they’ll be first in line to get it).  

But the people in between…the millions of people who earn their money honestly…who bus and tote…who toil and spin…who schlep and sweat, what happens to them?

Middle-class Delenda Est

On Friday, we looked at how the Roman Empire destroyed its middle classes. War and inflation have always been the leading ways to ruin a country. Both hit the middle classes especially hard…and then, without a strong middle class, the country itself stumbles and falls.  

You can see the phenomenon today in high-inflation countries. In Venezuela, the rich could dodge inflation with bank accounts in Miami. The poor had nothing to lose. But the middle class was almost wiped out.  

In Argentina, the process is less dramatic. But there too, inflation is said to be approaching 100% per year. The rich are moving their money to safety (after so many years of financial crises, they know what to do). The poor rely on welfare payments (moving between dozens of confusing ‘plans’). And the middle class, where can they move? What can they do? They sell their time. What do they do when time becomes less valuable?

Stay tuned…

Regards,

Bill Bonner,
For The Daily Reckoning Australia