Saturday, 10 February 2024 — Melbourne, Australia

By Murray Dawes Editor, Retirement Trader and Fat Tail Microcaps

[2 min read]

Dear Reader,

There has been a serious loosening of financial conditions over the past six months as markets prepared for interest rates to peak and then start falling in 2024.

US and European production growth is responding to better financial conditions despite the fact the Fed hasn’t even started cutting rates yet.

The possible fly in the ointment is if growth takes off like a rocket and inflation becomes a problem again.

But with the S&P 500 rallying strongly into record territory, the short-term outlook remains bullish.

Keeping an eye on US 2-year and 10-year bond yields is important as we move forward, because a further jump in growth may see yields starting to rise again.

The Fed is probably fretting about the loosening of financial conditions and came out recently trying to jawbone the market down by saying rates were going to stay ‘higher for longer’.

The market is ignoring the Fed for now, as upside momentum has taken on a life of its own.

In today’s Closing Bell video I have a look at the US 2-year bond yield over the last few decades and compare it to the moves in the S&P 500.

As you’ll see in the video, the favourite line of commentators that falling rates is bullish for stocks, isn’t always true.

If something breaks due to a long period of elevated interest rates, stocks plunge and rates follow stocks lower.

Chinese stocks have seen serious selling pressure recently and the liquidation of Evergrande opens up the possibility of further contagion in the Chinese real estate sector. US commercial real estate remains under a cloud and if rates stay high for an extended period, there is increasing risk that something breaks in that sector.

So despite the rosy picture that makes the odds of higher prices in the short term a good bet, there are dangers lurking in the shadows that investors should be aware of.

Regards,

Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps

Murray Dawes is our resident expert trader and portfolio managers. He is a former Sydney Futures Exchange floor trader who went on to design custom trading systems and strategies for ultra-wealthy clients (including one of Australia’s richest families). Today, his mission is to help ordinary Aussie investors make profitable investments, while expertly managing risk.

He uses his proprietary system for his more conversative and longer-term-focused service Retirement Trader…and then applies the same system to the ultra-speculative end of the Australian market in Fat Tail Microcaps (this service is strictly limited and via invitation only).

By Nick Hubble Editor, Strategic Intelligence Australia

[7 min read]

Dear Reader,

The least popular prediction of my career was that Western governments would soon engage in a desperate fight for more immigrants. They’d reverse policies designed to keep people out, and implement incentives to bring people in.

This might seem like heresy now — even more so than when I first wrote it a few years ago. The hate mail was glorious enough at the time.

But what if I’ve already been proven right?

What if my claim actually explains the bizarre divergence we are seeing between what voters want on immigration policy, and what their elected politicians are giving them?

After all, immigration rates are soaring in many developed nations around the world, even as the population turns ever more against them. For years people have been wondering why governments can’t and won’t get a grip on this rapid influx in the population. In every country’s news media I follow, immigration is the top story. It’s become the main political issue too.

The political consequences are on show...

In the Netherlands, an anti-immigrant party recently won the elections, but nobody will work with them in government because of their anti-immigrant stance. The Swedish population has turned from welcoming vast numbers of migrants to voting for anti-migrant parties in the space of a few years.

In the UK, the pro-migration control Reform party are gaining rapidly while the others dither on migration policy. In France, Marine Le Pen is likely to win the presidency next time around. In Italy, the anti-immigration Giorgia Meloni is now Prime Minister. At the EU level, anti-immigrant parties are set to become the major political force after this year’s parliamentary elections. In the US, immigration is turning into the main political issue dividing Trump and Biden. A news item on my Facebook feed reads, ‘Sky News host Andrew Bolt has urged the Liberal Party to shift the debate from tax to immigration.’

In Germany, on the other hand, protestors were recently out in force demonstrating in favour of the government’s pro-immigration stance and against a new upstart party’s anti-migration policy plans…

In so many countries, politicians presiding over immigration booms could so easily have stemmed the loss of their political support by stemming the tide of immigration with basic policies. In some cases, they only needed to enforce the law already in place to rescue their government.

Instead, they opened the border and demonised those worried about immigration rates as far-right. The end result was the end of many political careers and the downfall of some governments already. Ironically enough, this could result in genuinely anti-immigration policies rather than just controlled immigration.

But what if there’s something deeper going on here? What if out-of-control immigration is entirely deliberate? Not as some sort of conspiracy theory, but because immigration is seen as a solution that fixes an even bigger problem than…immigration itself?

Although I did not foresee that immigration would become such a divisive and dominant political issue, I did foresee that immigration would surge and governments would go from trying to keep people out of the country to trying to get them to come in.

I was right about what has happened, so perhaps my prediction explained why this has happened too?

The reason why I anticipated the immigration wave was fairly simple. The easiest way to keep our economy growing, our national debts affordable and our asset prices inflated is to import a lot of people.

Do you remember when Biden and Trump were busy arguing desperately about whether the US was in recession? Well, one way to goose GDP figures is to add more people to the country…

German GDP has flatlined, but what would the reading be without immigrants adding to GDP? And what would the political implications of a recession be?

Do you remember when Australia evaded a recession in 2008? That was only because immigration from other parts of the world surged.

If Australia were to shut off the immigration tap today, what would happen to house prices here? What would that in turn do to retirement plans, government tax revenues and mortgage defaults?

We are reading about labour shortages everywhere, but that’s with immigration at high levels. What would the shortages be like with low immigration rates?

Governments and economists are becoming increasingly concerned about the debt/GDP ratios of various countries. What would those ratios look like without immigration to goose GDP and tax revenue relative to the debts incurred in the past?

What would our economic projections of the future look like if the population stopped growing? Could we afford our national debt in the long run?

My point is that immigration can and is being used to cover up political and economic failures elsewhere: on GDP growth, government debt, vocational education, the housing bubble and much more.

The negative consequences of immigration are the lesser of two evils, especially if you’re not allowed to talk about them.

Only in Japan has the government stuck to its guns on tightly restricting immigration. It provides the counterfactual we need to figure out what’s really going on in the West.

Japan’s debt to GDP ratio makes other developed economies look boring. Their house prices fall instead of going up over time, as does their stock market, until very recently. Large parts of the country are depopulating fast, leaving all sorts of bizarre economic and social phenomenon we might want to avoid. ‘Our nation is on the cusp of whether it can maintain its societal functions,’ Japanese Prime Minister Kishida recently said. That’s about as bad as your worst right-winger’s description of too much immigration.

The Japanese have prioritised social cohesion over economic and financial stability. And so their fiscal situation is precarious, their economy suffers from bizarre phenomenon, asset prices don’t go up, there is deflation instead of inflation, and their GDP is described as having a lost decade for decades now.

Of course, Japan is only the opposite extreme that illustrates the point I’m trying to make. And it’s not like migration has delivered its promises very well everywhere. But can you see how politicians have chosen to use migration policy as an economic lever? They’d rather deal with the issues posed by high immigration rates than those issues which high immigration covers up.

Of course, things are changing in Japan. Immigration is slowly being accepted as a solution. One that other developed country politicians have been squeezing every last drop out of for decades, whatever the cost.

I’m moving to Japan next month, for about six months. And I lived there for a few years from 2020. I noticed how even a small amount of immigrants impacted social cohesion in the local town. The Brazilian age-care workers didn’t walk on the side-walk, they walked on the road. This caused traffic chaos.

The Vietnamese immigrants sat outside their shared house and smoked — something Japanese people find very intimidating and would cross the road for.

When I tried to join the local trampoline lessons, a lady almost had a heart attack because she had never spoken to a foreigner before. (Two years later, she came to the airport to say goodbye…)

The Azerbaijani bus crew which man the Haneda to Narita airport shuttle behave like Japanese robots. They go through all the motions of Japanese body language perfectly, but with none of the same meaning.

And I have no doubt the local contingent of Vietnamese and Brazilians will have grown from one shared house in the neighbourhood and a local church congregation to a much more noticeable presence when I go back. I wonder if this has increased the discomfort in the local town too.

I wonder how Western countries would change if they adopted a much stricter immigration policy…

And let me ask you this: what would Australia, the UK, US, Canada and many other countries look like today without their vast immigration intakes over the past few decades? Again, I was one of those immigrants, coming to Australia in 2003 and the UK in the 90s.

Sure, Australian social cohesion might be a lot better today if we hadn’t allowed in so many of my extended family...houses might be more affordable too.

But you have to accept that high immigration has delivered a lot of prosperity in other ways, just as we demand that others accept the impact on social cohesion. Without such high immigration, I suspect our government debt would be much higher relative to our GDP, and I suspect we would’ve had many more recessions over the past 30 years, for example.

I’m not asking which option you prefer. It’s obvious we’d all choose some differing level of immigration, not the two extremes. But, as anyone who has lived in both Japan and Australia understands, know there is a trade-off between immigration’s costs and benefits.

So, when it comes to managing the economy with immigration as an accelerator, we need to accept that, in the words of Thomas Sowell, ‘there are no solutions, there are only trade-offs.’

The refusal to see the costs of one side of the argument, and the benefits of the other, is what’s really wrong with the debate.

Kind Regards,

Nick Hubble,
Editor, Strategic Intelligence Australia

Nick Hubble found us at Fat Tail Investment Research in 2010 after a stint inside Wall Street’s most notorious bank, Goldman Sachs, during the 2008 GFC. That’s where he saw the true nature of the investment banking business. Since then, he’s been the editor of the Daily Reckoning Australia and the UK-based Fortune & Freedom and Gold Stock Fortunes.

He’s delighted to work as Investment Director and Editor for Jim Rickards’ Strategic Intelligence Australia. Here he helps turn Jim’s big-picture views into specific actionable advice and ideas for Australian investors.