Wednesday, 8 November 2023 — Melbourne, Australia | By Greg Canavan | Editor, Fat Tail Daily |
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In this issue: A small-cap idea for the WA boom Interest rates: worth caring about? Bill Bonner: ‘Terrorists’, ‘subhuman animals’, ‘extermination’... there's always more to the story... |
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[1 min read] Dear Reader, As everyone knows, the RBA increased interest rates again yesterday. Not because mortgage holders continue to splurge. But because people with no debt continue to spend! And governments at both state and federal level continue to borrow and spend too. The rate rise won’t impact that behaviour one bit. But when your only tool is a hammer… What is less known about yesterday’s rate move is what took place in the bond market. The 10 and 3-year bond yields both declined. That tells you the market thinks this is the last right hike. It also tells you it’s going to cause pain and slow the economy. Which is exactly what the RBA wants. I’m just not sure it will have the desired effect on inflation. I mean, what do you think is going to happen when you open the doors to 500,000 people? Housing and rents will explode. Not to mention soaking up capital and resources in an energy transition that will result in higher energy prices. They’re all longer-term problems to keep in mind. For now though, consider that bond yields have peaked. If that’s the case, what are the implications of that? It’s a question Callum Newman examines in the essay below. He points out how one big private property player just bought up $90 million in Melbourne office property. As an aside, the property sector jumped nearly 10% in the past week. That’s on the back of the ‘peak market yield’ view. It’s early days in this trend and it’s fair to say the market isn’t convinced. But the investment implications are certainly worth considering. Over to Callum for more… Shop Now: ‘Green Banana’ Stocks
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| By Callum Newman | Editor, Fat Tail Daily |
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[3 min read] Dear Reader, Today’s Fat Tail Daily begins with a hat tip to the team at Bell Potter for creativity. They’re current likening ASX Real Estate Investment Trusts to green bananas: ‘some people like them, but they’re not quite ready yet.’ Ha! Love it. As it happens, I was at an investor presentation last week with big time commercial property investor Warren Ebert. Here’s a snapshot of the man — a snappy dresser as you can see… Warren, via his firm, is buying two office buildings in Melbourne for about $90 million. Clearly, he’s not waiting for the market to ‘ripen’! It should be said that Warren invests via an unlisted trust. That means his assets and company don’t trade on the stock exchange. Take it for granted… If a big player like him is moving in on the discounts on offer, we can be sure other big money could flow to the property shares on the ASX pretty soon too. Let’s think along the same lines… I keep making the same case for the small-cap sector as well. Both the REITS and the small caps have been carted like a Glenn Maxwell pull shot in the last two years. This has happened for the same reason: rising interest rates! You and I both know we copped another one yesterday. The market rose in the week preceding the announcement. Clearly it had priced this rise in because there was no great sell off after the news came out — in stark contrast to earlier in the year. Good news… It seems as of now, the market thinks this may be the end for rate rises. This is important. Part of what has rattled the market is the uncertainty around how high rates could go. The more certain we can be that the rises are over, the more investors will feel comfortable allocating to risk assets. Right now, you have a chance to accumulate small-cap shares while they are trading at depressed prices. But where to start? Here’s one idea for you. I mention that Warren Ebert presentation for another reason. I happened to chat to one of his investor relation team. This gent — a lovely chap, by the way — is tasked with raising money from investors to close the deals. He told me, ‘There’s a lot of money in Perth right now’. This stands to reason. We’ve had big commodity profits in recent years, with iron ore riding high (still), the lithium bonanza and, recently, even oil and gas pumping out profits. Much of these big profits, capital spending and high wages occur in Western Australia. I don’t know of a REIT that has exclusive assets in WA. How else can we take advantage of a boom going on there? My idea is hidden. It’s not an obvious way. It’s via retailer Beacon Lighting [ASX:BLX], which I’ve previously recommended in my Small-Cap service, Australian Small-Cap Investigator. Beacon, like most retail stocks, has been clobbered in the last few years. There’s a lot of bad news battered into the stock at this level. But it’s an established, profitable business. The team behind it have been doing it for a long time. You could make a case to pick it up just for its existing operation now. Yes, retail and consumer sentiment are hurt by rising rates. But not everyone is. For most people over 50, rising rates are a boon. They get more return from their savings! They don’t have mortgages. Beacon has every chance of catering to and monetising this demographic. Then we get the cherry on top. Beacon’s management have made it known they intend to expand their retail footprint into WA. They are currently heavily biased to the east coast. This is not the type of expansion they can do in six months. You need to be prepared to look out 2–3 years and give management time to rollout their WA stores. You also need to back management to deliver. Think about your future self here. In 2025 or 2026 it’s possible you’ll be reading Beacon’s results and hearing about how well their WA stores are trading. The current interest rate squeeze will likely be forgotten. Who knows where consumer confidence and spending will be by then? No one. We do know that house prices are rising again, and even the RBA acknowledges that the wealth effect of property pushes up consumption. Again, the proven team at Beacon has every chance of taking advantage of this. Here’s another thing I got from that Warren Ebert presentation. He suggested the recent immigration into Australia might even be bigger than most mainstream reports, based off stats from the Immigration Department. I can’t be sure, but I do know migration is surging in Australia at the same construction costs are surging and putting the profit out of building houses. A house price boom looks as inevitable as anything in financial markets can be. And there’s Beacon trading at a modest P/E and with low liquidity. Small-cap investing carries high risk and you should always conduct your own research before investing. You might be early buying today. But in three years? Well — there’s no better taste than a ripe banana. Best wishes, Callum Newman, Editor, Fat Tail Daily Advertisement: Five ‘Big Buy’ Stocks That Are Moving RIGHT NOW I just issued a ‘Big Buy’ alert on five small caps: BIG BUY #1: An $800 million firm playing the $1 trillion infrastructure boom. BIG BUY #2: One small Aussie miner cashing in on the global push for ‘green steel’. BIG BUY #3: A gold miner sitting on a potential $150 million haul. BIG BUY #4: A key player in the $2 trillion mortgage market as property is set to make a comeback. BIG BUY #5: A 26-cent medical stock (at time of writing) capitalising on the ‘Big Australia’ policy. They’re all undervalued and cheap, but with huge upside potential, making them ‘big buys’ right now. Click here to learn more. |
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Should We Care About Interest Rates? |
| By Kiryll Prakapenka | Editor, Fat Tail Daily |
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[4 min read] Dear Reader, It’s fitting the Reserve Bank’s first interest rate raise since June coincided with the Melbourne Cup. It’s the closest thing macroeconomics has to gambling. Macro traders keen on horses got a double shot of speculating on Tuesday. But Wednesday brings the bleary-eyed fallout. I know at least one person is fuming at the RBA. Our editorial director Greg Canavan said on last week’s episode of What’s Not Priced In that another hike was absurd. But here we are. Yes, the rate hike was expected. But anticipation doesn’t sweeten the bitter pill mortgage holders are about to swallow. Yet should the hike worry investors? Before I get to that, let’s briefly unpack the RBA’s decision. RBA not pleased with pace of deflation The last few statements following the RBA Board’s decisions have largely been facsimiles. No major edits or insertions. A copy-paste job. Michele Bullock’s statement on Tuesday had major work done, though. A whole paragraph was cut, another added. The Reserve Bank’s inflation forecasts were the biggest change. Bullock admitted inflation is ‘proving more persistent than expected a few months ago’. Progress to cool inflation ‘looks slower than earlier expected’, too. September’s CPI quarterly drove the RBA to rethink its forecasts. The central bank now expects headline inflation to be around 3.5% by the end of 2024 and near 3% by the end of 2025. Inflationary discomfort is dragging on. Bullock said the ‘risk of inflation remaining higher for longer has increased’. What hasn’t increased is the expectation of more hikes. The market took Tuesday’s decision on the chin. The Aussie 10-Year bond yield fell slightly overnight to 4.69%. And the Aussie dollar fell 0.80% against the USD. Traders don’t see further hikes ahead because of one word change. October’s statement ended with the caution that ‘some further tightening of monetary policy may be required’. November’s statement changed to ‘whether some further tightening of monetary policy is required’ will rest on incoming data. Westpac’s new chief economist Luci Ellis, a former RBA veteran, interpreted this thus: ‘This reads as the Board hoping not to have to raise rates again, but being very willing to do so if things change. There is not enough new information between now and the December meeting to drive a change in view.’ With her three-decade stint at the Bank, expect Ellis to become the next RBA whisperer. What’s up is down, what’s down is up… If the market runs with Ellis’s take that the RBA won’t want to raise again, Aussie bond yields may start falling. US bond yields already are. And the market is assuming falling bond yields are bullish for stocks. Which makes me wonder. Can a bad sign for the economy be a good sign for stocks? That seems to be the predominant thinking lately. In 2023, markets cheer economic bad news and fear good economic news. Last week, the Wall Street Journal reported that a ‘sharp US hiring slowdown … helped extend a furious market rally’. Why? A hiring pullback is likely to ‘bring the Federal Reserve’s historic interest rate increases to an end’. Markets seem to operate under the rubric that what leads to lower rates is good; what leads to higher rates is bad. Higher bond yields, more pressure on stocks. Boo! Lower bond yields, less pressure on stocks. Yay! But it can’t be that simple. I’ve said this before: what causes rates to fall matters more than the fall itself. Interest rates may fall because aggregate demand is plummeting. Yields may fall because economic activity is stalling. Neither is good for corporate earnings. Interest rates and business performance Now, onto the earlier question. Should investors care about interest rates? As much as good businesses should. That is, little. With a caveat. Rising interest rates are a cover for bad businesses and a nothingburger for good businesses. Struggling firms can pin any problem on rates and hope enough investors fall for it. Quality firms don’t need scapegoats: good performance encourages honesty. Let’s consult some business strategy books. Books on competition and how to avoid it or crush it. Contemporary Strategy Analysis by Robert M. Grant mentions interest rates exactly zero times. David Besanko’s well-regarded Economics of Strategy mentions interest rates exactly three times. Each mention focused on private corporate bonds. Michael Porter’s iconic Competitive Strategy mentioned interest rates once, in this sentence: ‘Complementary products should be viewed broadly. For example, credit at prevailing interest rates is a complementary product to purchases of durable goods.’ The father of competitive strategy paid no attention to interest rates at all. Now let’s turn to less academic texts. Works by investment practitioners, preferably. Bruce Greenwald’s Competition Demystified mentions rates five times. All incidentally. Morningstar’s Why Moats Matter mentions interest rates four times. Only one mention was significant. And here’s the aforementioned caveat. Interest rates matter to businesses whose business is interest rates. Banks, financial services firms, REITs, etc. For other industries, rates are tangential to good business performance. They’re not what good managers think about or what good strategy builds around. But the market obsesses about them. Sometimes to your benefit. Greg summed it up well for The Insider earlier this week: ‘But as always, have a focus on value. There are plenty of good stocks on the ASX trading cheaply right now. Notwithstanding the recent rally, they may get cheaper as the RBA fights inflation with a blunt instrument. ‘But the opportunity to buy good stocks at good prices doesn’t come around often. Don’t let the RBA distract you while the sale is on.’ Don’t let the RBA distract you! Regards, Kiryll Prakapenka, Editor, Fat Tail Daily When the Irish were Palestinian |
| By Bill Bonner | Editor, Fat Tail Daily |
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[4 min read] Dear Reader, My Lord of York, try what your fortune is. The uncivil kerns of Ireland are in arms, And temper clay with blood of Englishmen. To Ireland will you lead a band of men, Collected choicely, from each county some, And try your hap against the Irishmen? ~ William Shakespeare It’s easy to get discombobulated by the propaganda press. The lurid headlines attract your interest like a kind of newsporn — fascinating, intriguing, but ultimately fake. The media wants to keep the narrative simple enough for a popular audience. You’re either with us or against us. Good guys vs. bad guys. Pro-Israel or anti-semitic. Orioles vs. Blue Jays. No middle ground…no ambiguity. It wants us to ask no questions…to take sides…to cheer for the hometown and curse the out-of-towners. More to the Story But there’s always more to the story. And in the financial world it’s always the ‘more to the story’ that is most important. What ‘everybody knows’ is already fully priced. Investors have bought or sold, depending on what they read in the newspapers. Left under-priced and undiscovered are the things everybody doesn’t know. That’s where the big pay-off comes. In the mortgage finance crisis of 2008, for example, everybody knew that house prices always went up. Except John Paulson. He knew they didn’t always go up. When they become grossly overpriced—so that the average family can no longer afford the average house — they tend to come down. His hedge fund bet against the housing market, and while 4 million people lost their homes, his fund reportedly made $20 billion. Michael Burry is probably better known, since he was portrayed in the movie, ‘The Big Short.’ He, too, saw the ‘more-to-the-story’; he shorted (sold) mortgage debt and made $100 million for himself on the trade, and another $700 million for his investors. In politics, the ‘more to the story’ is the part they don’t want you to know. Huge efforts — backed by billions of dollars — are spent to keep you from knowing it. People with ‘more to the story’ thoughts are calumnied as traitors, Russian assets (as Hillary Clinton said of Tulsi Gabbard), ‘racists,’ or today’s favourite, ‘anti-semitic.’ And for most people, who have neither the time nor the energy to look further, that’s all the story they need to hear. Spin efforts are usually successful. Russia, bad. Ukraine, good. Israel, good. Palestine, bad. ‘Human Animals’ So, it must have been that when Irish ‘terrorists,’ led by the Fitzgeralds of Desmond, attacked the English in the 16th century. English, good. Irish, bad. Thousands were slaughtered as the Irish tried to push the invaders out of Munster. As many as a third of the population of the region died. Finally, in 1583, the Earl of Desmond died and the uprising was over…for a while. Back in London, the ‘more to the story’ was unnecessary and unwelcome. The English had been attacked by Irish rabble. The ‘terrorists’ should be eradicated…exterminated. After all, they were little more than ‘human animals’ or even subhumans…some said they were the remnants of the Neanderthals who once inhabited all of Europe. And England had a right to defend itself! Irish terrorists were a constant threat. They attacked English soldiers. They couldn’t be trusted. They were uncivilised. They spoke a barbaric tongue…and to top it off, they were Catholics, taking their cues from a hostile European Pope. How long would it be before they would invite the French or Spaniards into Ireland…and use it as a stepping stone for an invasion of England? In 1594, the Earl of Tyrone, Hugh O’Neill, had asked for help from Spain. Long promised, finally, four thousand Spanish troops managed to land at Kinsale in Southwestern Ireland…but ill-equipped and ill-prepared for the Irish winter. Meanwhile, an ‘English’ force from Dublin arrived…and made an alliance with an Irish contingent under Donogh O’Brien. Soon, the combined armies had the Spanish besieged in Kinsale. The Spaniards were running out of food, while the rebel Irish armies of O’Donnell and Maguire slugged through the autumnal mud, hoping to relieve them. The final battle took place on the hills outside Kinsale as the Spanish anxiously awaited the outcome. It was decided by cavalry. The English cavalry attacked the Irish footsoldiers, who fought them off with the traditional ‘hedgehog’ formation of long spears. Unfortunately, as the English withdrew, the Irish cavalry, mounted on their scrawny ponies, thought they were in retreat; they charged wildly, hoping to cut them down as they fled. Instead, the English, with better, heavier horses and a more disciplined approach to warfare, turned and stood firm, absorbing the shock with hardly a flinch. Then, when the Irish withdrew they did so in poor order, giving the English an opportunity to inflict great damage. Seeing their cavalry defeated, the rest of the army fled. No Mercy Soon after, the Spaniards surrendered…and the surviving Irish took to the hills. At this point, the Irish were defenceless. Like Palestinians in Gaza, they could harass, but they could mount no serious challenge. Ireland was at the mercy of English troops…who had no mercy to give. The Irish nobility was hunted down. Speaking Irish was forbidden. Catholics weren’t allowed to own land. The Irish justice system…its laws…its customs — all were outlawed. Many of the celtic nobles, what was left of them, fled the country. ‘The flight of the earls,’ as it was called, left the island with few native leaders to counter the English. In 1641, Irish ‘terrorists’ once again attacked the English…particularly settlers in the North. In what was to become a popular theme for political propaganda, cartoons showed the rebels impaling Protestant babies on their pitchforks! This gave the war mongers and land grabbers an excuse. Once again, more Irish land was confiscated and sold to fund the military campaign. By the middle of the 17th Century Irishmen had a grim choice — ‘To Hell…or to Connaught.’ British historian John Morrill calls it ‘the greatest exercise of ethnic cleansing in modern European history;’ thousands of the surviving Irish had to pack up and move west — to the poorer land on the Atlantic coast. (Incidentally, their descendants, farming small plots in West Ireland, suffered most heavily in the Potato Famine 200 years later.) Many Irish tried to escape the violence by going up into the mountains. In the first invasion, in the 12th century, the Irish fled into the forests, where they were known as ‘wood kerns’ (see Shakespeare, above). In the 17th century, they were known as ‘tories.’ Being a ‘tory’ was itself punishable by death, with ‘tory hunting’ encouraged by the settlers. Meanwhile, the English troops burned crops and barns and took any animals or food stocks they discovered. The result was widespread famine. But violence works! The brutal campaigns — especially Oliver Cromwell’s scorched earth approach — did the job. Ireland was pacified and ruled by an Anglo-protestant ‘Ascendancy’ for the next 300 years. Regards, Bill Bonner, For Fat Tail Daily All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment. |
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