Monday, 24 April 2023 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

50% in five months.

That’s how much subscribers of Australian Small-Cap Investigator could have made if they followed my recommendation last November to buy Bellevue Gold [ASX:BGL].

I advised them to bank the win last Monday.

Not all my tips have resulted in such gains, but this one was a beauty.

Gold stocks have been on a ripping run over this period.

What you may or may not realise is how terrible gold stocks were for the preceding TWO YEARS before that recommendation.

I watched it all play out, day by day.

Here’s why I mention it…

Think about what’s fired up the gold sector lately.  

Back in November, I had no way of knowing that several US regional banks would collapse.

There was no way to predict that the global interest rate hiking cycle would be stopped in its tracks.

Nor could we be confident that US dollar gold would finally breach the US$2,000 mark so soon.

However…

What I DID know in November last year was that Aussie gold stocks had been so hammered that it would merely take things becoming ‘less bad’ for the sector for them to get a kick.

And there were enough global fundamentals in place to think gold stocks could soar again.

Individually, as a company, Bellevue Gold could deliver on its project milestones regardless of what the wider world did.

In other words, I saw a low-risk, high-reward opportunity.

My readers who followed my advice are reaping the fruits of that idea right now.

The good news, in my view anyway, is you can almost throw a dart at the stock market and see similar opportunities across multiple sectors…small caps especially!

Yep. I’m suggesting that the dynamic that just fired up gold investors will play out for the general market, but small caps especially.

Here’s one reason why, courtesy of a fund manager cited in the Australian Financial Review today:

‘Costa says now is a great time to invest because small caps ‘‘tend to have a tighter correlation with the economic cycle’’ and as a result ‘‘outperform the large caps into a recovery phase often with a sustaining multi-year cycle’’.

‘This is especially in the context of ‘‘lead economic indicators beginning to show that we will be making our way through the worst — it’s a very exciting time for them’’, she said.’

I agree.

‘But’, I hear you say, ‘What about…’

Stop!

Yes, I know, I know.

We’ve had all sorts of problems over the last 12 months. You don’t need to name them.

The market is highly likely to climb these worries now.

It would take something none of us is watching to really drag things back down from here.

Anything’s possible — but that’s the risk you take entering the stock market, at any time.

And small caps are particularly high risk. You can lose all or part of your investment at any time.

But here’s what’s so compelling about now.

So much bad news is priced into stocks!

That means if things turn out to be less bad, they’re likely to go up.

I can see one example of this playing out in my accounts right now.

About a month ago, I started buying shares in building products firm James Hardie Industries [ASX:JHX].

This got clobbered last year. It downgraded its earnings three times. The hit was real.

Here’s what stuck out though. After the third downgrade, the stock held steady, and indeed rose a bit.

That kind of price action suggested the market was now looking beyond the immediate issues to a potential recovery.

James Hardie operates in a cyclical business. It’s also heavily exposed to the US residential housing market.

Rising interest rates suppressed this sector in 2022.

But suddenly US homebuilders are taking off. Even at higher rates, people still need to live somewhere, and the US is short houses.

Last week came this news from Firetrail Investments:

‘Homebuilders had a strong week of performance after March US housing starts beat estimates. Housing starts were -0.8% m/m (vs -3.5% expected) and single family starts were +2.7% m/m.

‘Following the “better than expected” data, the largest home builder in the US beat expectations last night, DR Horton. The builder said “we see much more stability in both cost and demand and deliveries and margin”.

‘DR Horton is the largest customer of Aussie portfolio holding James Hardie.’

Beauty!

JHX is up about 7% for me as of now.  

This is not a boast. I’m just showing you how some of this is playing out in real time.

JHX should be a sturdy position. But it’s not going to skyrocket 50% in five months like Bellevue Gold did.

That’s why the small-cap sector can be so thrilling to be a part of.

What are you waiting for? Click here to get started.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: There will be no Daily Reckoning Australia published tomorrow due to the ANZAC Day public holiday. We will return to our regular publishing schedule on Wednesday, 26 April. Also, as of next week, Callum will be joining our Money Morning team. If you’d like to continue reading Callum’s articles, be sure to subscribe for free by clicking here.

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

Coming up for US deciders is their most important decision in at least 40 years. It can be reduced to a simple question: Are we headed down the Argentine path or not? The Argentines are champions of the world at soccer. What they don’t know about kicking cans down the road isn’t worth knowing.

But what about the US? Where are we headed? That is not just a question for the authorities; it’s a question for you. If we’re bound for the pampas, better pack light…and bring lots of real money; you’re going to be glad you did.

That’s the ‘inflation route’. ‘Print’ money…and pay the costs later. And we warn you: the roads are rough…and dangerous.

The deflation trip is no picnic either. But those are the two choices. When you deflate, you take the pain now. When you inflate, you take the pain, more of it, later.

And by all means, don’t get on the wrong bus.

This raggedy plane

Here’s the situation now. Prices are falling (deflation). Commentators are joyful. ‘Inflation is beaten’, they say. ‘A soft landing, after all.’

From Charlie Bilello:

• ‘US Producer Prices (PPI) increased 2.75% over the last year, the 9th consecutive decline in the YoY rate-of-change and the lowest print since January 2021. PPI peaked at 11.7% in March 2022.
• ‘Year-ahead business inflation expectations continue to fall, down to 2.8% in the latest Atlanta Fed survey. That’s the lowest we’ve seen since July 2021.
• ‘Global Container Freight Rates (cost of 40′ Containers) are now lower than they were in February 2020 (pre-covid), down 87% from their peak.
• ‘US Import Prices fell 4.6% over the last year, the largest YoY decline since May 2020.
• ‘U.S. Asking Rents are lower than they were a year ago, the first YoY decline since March 2020.’

But this raggedy plane has barely begun its descent. While some prices are falling, others are still rising. Shelter, for example, rose 8.2% in the latest reading — the biggest increase in housing since 1982. And transportation. From Bilello:

‘The average monthly payment for a new car has skyrocketed to $777, which is nearly double the average payment in late 2019 (Kelley Blue Book data). Nearly 17% of consumers who financed a new car in the first quarter of 2023 had a monthly payment of $1,000 or more (a record high), up from just 6% in the first quarter of 2021 (Edmunds data).’

Taking the most common measure — the ‘sticky’ CPI, less food and energy — price inflation is actually going up, not down. It was mostly the falling price of oil that brought the overall measure down last month. But wait, oil may be going back up. 

Inflation volatility

What these numbers — some up, some down — are showing us is that inflation is far from beaten. It’s what happens when the feds spend more than they can afford year after year. And now the federal government is facing trillion-dollar deficits ‘as far as the eye can see’.

Yes, dear reader…inflation is always and everywhere a political phenomenon. And stopping it involves pain…political as well as economic. Push hasn’t yet come to shove, but when it does the pain will come with it.

From the Greed & Fear reports:

‘…a little noticed working paper by the Federal Reserve Bank of Cleveland, published in January (“PostCOVID Inflation Dynamics: Higher for Longer” by Randal J. Verbrugge and Saeed Zaman, 13 January 2023). This paper found that if the Fed really tried to reduce inflation to 2%, it would cause the unemployment rate to rise to 7.4%.’ 

And here, David Stockman reminds us of the pain inflicted by the Fed in 1982:

‘Volcker pushed the real yield on the 10-year UST [Treasury bond]…from -3%in late 1979 to a peak of +9.3% in August 1983, sustaining that purgative real rate at +5% through early 1986. In the process, everything else fell into place:

• ‘Unemployment…soared to 10.8% in Q4 1982, a victim of depriving the economy of unsustainable activity fueled by a decade of easy money.
• ‘Real GDP…took a deep dive to -6.2% in Q1 1982, but with the fall of inflation came bounding back to +7.9% in Q3 1983.
• ‘CPI inflation…which had stood at 14.6% on a Y/Y basis in late 1979, plummeted to 2.5% by Q2 1983.’

And now, Stockman makes our point:

‘Accordingly, reversing bad policies inherently involves purging their macroeconomic effects. The estimable phrase “no pain, no gain” is rooted in the fundamentals of sound economics.’

So today, we end up where we left off yesterday, with a question:

In today’s US, can policymakers really stand the pain of a genuine fight against inflation? Or will they cave under pressure from the rich — whose assets are collapsing in value...and the poor — whose transfer payments are threatened by tightened federal budgets?

The answer — if Argentina is anything to go by: the pain of inflation may be much greater over the long run…but the pain of deflation is more immediate. Push comes to shove; they’ll push and shove for inflation.  

More to come…

Regards,

Bill Bonner,
For The Daily Reckoning Australia