Thursday, 17 February 2022 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[6 min read]

• Callum’s strategy appears to be working…
• Vicinity results: more in the tank once COVID passes
• Plus, tune in to our podcast for great content!

Dear Reader,

1) ‘Banks, builders, and REITS.’

That’s how I summed up the way to play the property cycle over the next five years in my recent presentation to investors.

Yesterday, we got some evidence that such a strategy is working!

How so?

Big real estate investment trust Vicinity Centres [ASX:VCX] released its half-year results. The market liked them too…the stock soared 11% yesterday.

That’s a big move for a REIT.

We can put that down to the market being too negative on the company before the announcement. I was one of the guilty ones too.

I recommended Vicinity in February 2021…but I suggested cutting it later that year when COVID ran through Victoria again. A good chunk of Vicinity’s assets are in VIC, so I played it safe.

I don’t regret the decision because we’ve made profitable decisions elsewhere, but it’s nice to see the general sector is on track.

What can we learn?

Part of Vicinity’s improved profit was from revaluing its real estate holdings higher. This is a key part of the tailwind behind the sector. 

But Vicinity also saw improved spending metrics across its centres and improved leasing ‘spreads’ from the COVID train wreck of the last few years.

Here’s something notable I picked up on: Vicinity still has retailers in CBDs and sectors hit hardest (i.e., travel) that haven’t fully recovered. Vicinity is still subsidising and helping here.

Why do you care?

Once we leave COVID behind, which I’m supposing we do eventually, Vicinity still has earnings growth to come from these distressed parts of this business coming back to health.

Then we have potentially more to come from its development plans. All in all, a nice result and outlook.

The ‘good news’ is out about Vicinity, so I’m not buying it or recommending it now, but as a long-term play on commercial property, it’s worth following.

For my current REIT suggestions, sign up here!

2) By the way, I’m not the only one banging the drum for commercial property in Australia.

The Australian Financial Review reports this morning that super funds have a huge war chest to go shopping here…and a very good rationale to do so.

Why so?

They are ‘underweight’ commercial property, as they say in the investment parlance.

But perhaps this is the key quote:

‘Fuelling sentiment is the fact that many ASX-listed property trusts are trading at levels well below the valuations of their real estate holdings.’

Indeed.

Commercial property is ideal for super funds, in many ways, because they need big assets that have long time frames plus income.

There’s an important point here. So much of Australian real estate commentary is about the residential sector.

But commercial property has also been an outstanding sector for returns over the years. And you can buy as little or as much as you like on the Aussie stock market.

Consider it if you haven’t!

3) You might have noticed that the market is beginning to make up the ground it lost in January.

One reason, I think anyway, is that commodity prices are so strong. Iron ore, gold, oil, copper, aluminium, gas…you name it, they are currently all roaring along.

It’s hard to be too bearish when this happens because it drives such strong earnings. Take a look at iron ore, for example.

BHP just announced a record interim dividend. Their average iron ore price for the last half was US$113.

Iron ore is currently US$140 a tonne. The longer it holds, the more money BHP brews up in its accounts for its full-year results due in August.

Will iron ore hold? I have no idea.

All I can say today is that the market became too bearish in January relative to what has happened since.

It was also a reason I was comfortable to step in during January to ‘buy the dip’.

One thing gives me pause. I’m starting to see many bullish commodity headlines about a new ‘supercycle’, US$100 oil, a rocketing lithium price, etc.

Mr Market loves nothing better than to pull the rug from underneath us when we least expect it.

But what could cause such a thing?

Right now, the market is obsessed with inflation and interest rates. It’s unlikely to be from that.

It would have to be something that took everyone by surprise. But there’s nothing that really springs to mind to even speculate on.

I’m riding the market as it trends up…but I try not to let confirmation bias get me too carried away, either.

It usually pays to be contrarian.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Don’t be shy! Come check out my podcast on Spotify here. We have some great content…all free. Let me know what you think!

By Bill Bonner Editor, The Daily Reckoning Australia

Is the Fed really as incompetent as it appears? Today, we take a look.

The Fed’s inflation now vexes consumers…investors…and politicians. CNS:

‘The average price of a gallon of self-serve regular gasoline in Los Angeles County rose four-tenths of a cent Saturday to $4.754, a record high for the eighth time in the last nine days.

‘The average price has risen 12 of the past 13 days, increasing 8.6 cents, including three-tenths of a cent Friday, according to figures from the AAA and Oil Price Information Service. It is 2 cents more than one week ago, 8 cents higher than one month ago and $1.21 more than one year ago.’

And voters are feeling the pinch. One headline put the increase in monthly expenses per household at US$256.

‘Do something’ are the words going out to Fed governors. But ‘go easy’, says the elite. The last thing it wants is a screaming crash on Wall Street.

Yes, the Fed put itself in a vice. On one side is the interest rate suppression and money printing that has paid the feds’ bills and made the rich richer. On the other side is the Main Street economy, which craves stability, steady prices, and honest interest rates. On one side are the 90% of Americans — hard-working families with limited budgets who suffer inflation like tooth decay, painful and debilitating. On the other is Wall Street and the elite, who make the rules…control Congress…and the Fed itself.

And now the vice tightens, and the Fed’s ‘credibility’ is about to crack.

A guardrail for capitalism

‘Credibility’ is almost always an invitation to disaster. Alexander Hamilton must have thought his credibility was at stake when he agreed to a duel with Aaron Burr. The French under Napoleon III thought their credibility was on the line when they went to war with the Prussians in 1870. And it was a matter of ‘credibility’ that kept US boys dying in Vietnam…and later Afghanistan…long after they should have gone home.

What mischief will ‘credibility’ beget this time?

September 2008 was probably the decisive moment. The Fed’s credibility was in question then too. Ben Bernanke, Fed Chief, was centre stage…addressing Congress. It was a moment that defined Bernanke as a snivelly little grifter, and it defined the Fed too. Thenceforth, it would play the lead role in the destruction of the US’s prosperity.

The Fed was meant to be a guardrail for capitalism. A bankers’ bank, it was expected to keep its head when others were losing theirs. It was supposed to maintain an atmosphere of calm calculation and reasoned reflection in order to prevent the sort of panic that leads to chaos and unnecessary losses.

But there, on 10 September, was the Fed Chief himself, Benjamin Shalom Bernanke, acting as if a giant meteor were about to hit the Rose Garden. He did not seek to restore a mood of quiet deliberation among the nation’s legislators but to set their hair on fire with visions of Armageddon.

In short, in order to panic Congress into passing a US$700 billion bill that not a single member had read…for reasons none understood…he resorted to the biggest whopper ever told by a central banker.

With no hint of a smile, Bernanke told Congress that if it didn’t pass its crackpot stimmie bill on Friday, ‘We may not have an economy on Monday.’

This was plainly absurd, and everybody knew it.

Too stupid to succeed

The mistake investors, householders, businesses, and speculators had made was borrowing or lending too much money. They did so largely because the Fed itself had misled them, holding interest rates too low for too long…and encouraging debt.

But economies don’t cease to function just because the central bank makes mistakes. Left alone, markets correct errors, which is just what the US stock and bond markets were doing. They were separating the good investments from the bad ones.

Markets sort out excess debt — quickly and efficiently. The credits are marked-to-market. Debtors default. Debt decreases as intrepid lenders rescue the best of them, while the others are left to sink.

It would have been a huge mistake to step in and stop the rectification process. But that is exactly what Ben Bernanke, an academic economist with no knowledge or understanding of how a real economy works, was doing.

His message was breathtakingly naïve and dumbellish. It was like giving your bank details to a Nigerian you met over the internet…and then waiting for the $25 million deposit to come in. Instead of allowing market capitalism to fix its bad debt problems, Bernanke, Yellen, and now Powell came in with what the market least needed — more EZ credit. The Fed’s key interest rate was pushed down to ‘effectively zero’, where it’s been almost ever since. And then, as consumer prices inevitably rose, the Fed’s key lending rate — in real terms — kept going deeper and deeper into negative territory, so that it is now about MINUS 7.4%.  

Once the Fed was on the case, not a single large lender went broke. Those that were too stupid to succeed became ‘too big to fail’. Fools and their money stayed together. Reckless managers got their bonuses…and became more reckless. And the excess debt problem became much, much worse. Total US debt almost doubled, from around US$44 trillion in 2008 to US$86 trillion at the end of 2021.  

What kind of way was this to fight a debt crisis? 

Alas, the Fed learned nothing. It continues to print money at the rate of US$20 billion per week. And it promises to do something to protect its credibility. What? Word on the street is that it is going to raise rates! Maybe even 100 basis points! That would bring the rate to MINUS 6.4%.

We get a little dizzy just thinking about it.  

Regards,

Bill Bonner,
ForThe Daily Reckoning Australia