Monday, 1 August 2022 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[6 min read]

• Oil bulls take note of this decline…
• Rate expectations cooling a tailwind for property stocks
• Plus, one stock that defies calls for a property crash

Dear Reader,

1. Oh my, would you believe this? Just as we all thought oil might head north of US$150 a barrel, part of the sector is doing a 180.

You might notice when you look out the side window of your car, petrol prices are retreating. There’s a reason for this. But is it supply or demand?

Well, it’s probably both. But I suspect it may be more demand softening than supply surging.

PK Verleger is an associate of mine and has covered this space for 50 years.

Data out of the US shows ‘gasoline’ use is down from its previous highs even before COVID. And this is in the peak summer driving period.

This is hitting the refiners between the legs, as Reuters reported the other week:

‘A sudden crash in global gasoline prices in the past two weeks has dented refiners' profits, pushing up inventories in key trading hubs around the world while looming exports from China and India also add to pressure on growing stockpiles.’

Unfortunately, I don’t have the data for Europe, but one analyst said natural gas prices there are trading for the equivalent of $600 a barrel.

That has to hit demand as discretionary income gets choked.

One wonders if gasoline use will ever breach those old highs in the EU and US.

Data out of California seems to imply a permanent decline because it’s the leading state in terms of electric vehicle (EV) adoption.

Just on that. Another early adopter of electric vehicles is Norway. 

Last month, their statistical agency said, ‘electric vehicles now drive more miles annually on average than cars running purely on gasoline or diesel’.

I’m prepared to back the idea that more countries will turn like Norway and California than not in the next five years.

That’s why I view now as a perfect time to accumulate stocks related to the EV transition, like my favourite three.

We just got good news from one of them this morning…and it’s up in trade as I write. Don’t wait!

2) Another statistic release I like to follow is those from the banks each month.

We can see how much credit is going out, and into which sectors. We got the data from APRA last Friday.

The Australian Financial Review (AFR) covered it like this:

‘As banks prepare their earnings updates and the Reserve Bank prepares to once again increase interest rates, more evidence of a slowdown in new mortgage lending to owner-occupiers has emerged.

‘The latest Australian Prudential Regulatory Authority data for June showed lending growth moderated to 0.8 per cent to $10.5 billion for owner-occupiers and 0.7 per cent to $4.8 billion for investors in the last month of the financial year.’

Hmm. Slowdown? OK…yes…0.8% to owner-occupiers may be slowing down, but that figure is much higher than the dog days of 2019.

And get this when it comes to the investors. The AFR says:

‘Investor loans, however, grew by 6.4 per cent month-on-month, the highest since November 2015, as cashed-up landlords get ready for the return of international students and other migrants.’

Hmm. How does the strength in investor lending (and soaring rents) square with those calling for a 15–40% decline in house prices?

In my view, it doesn’t.

It would take a much more substantial subtraction in those credit statistics to have me worried.

But, hey, you don’t have to believe me. The share market can help out here.

For example, REA Group [ASX:REA], which runs realestate.com.au, has rallied more than 20% since June. This wouldn’t happen if the market was still fearful of a property crash.

I’m kind of kicking myself for not buying it for less than $100 when I had the chance. It wasn’t fear that held me back, it was greed. I wanted it cheaper!

Now I think the opportunity may have passed. That’s not to say the market will go up from here. But rarely do you get a second look when a unique opportunity presents.

Ah well! Every day another train leaves the station. To my mind, there’s plenty more bargains around property out there on the market. The previous hammering was prodigious.

But we can see the impetus for a potential rally another way. Interest rate expectations are moderating.

See here from the AFR:

‘Money markets have significantly wound back pricing on the expected peak Reserve Bank of Australia cash rate to 3 per cent, down from as much as 4.5 per cent tipped less than two months ago.’

That doesn’t seem so scary, does it?

3% doesn’t even put the rate at equal to the current rate of inflation.

All in all, the current market weakness is a buying opportunity if you’re in for the long term. The short-term time frame is trickier.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

Last week, there was some big news.

First, the Fed didn’t ‘pivot’ away from its tightening program. The BBC: ‘US makes major rate rise to tame soaring prices’.

That news was widely anticipated. It leaves the Fed’s key rate about 7.5% BELOW the consumer price inflation level. So the Fed may be properly described only as making the noose…it’s still a long way from putting it around his elite friends’ necks.    

Investors bid up stocks on the news, probably guessing that the Fed chief might change his mind before he actually hangs anyone.  

Which brings us to our second big headline: ‘Senate Passes Bill to Pork Up Semiconductor Industry’.

Don’t bother to look it up. As far as we know, no reputable media outlet wrote an honest headline on the subject. It fell to us to clarify what was really going on.

The US$280 billion pig

Here’s The Hill with more details:

‘The $52 billion subsidy bill is just a pig dressed up in high-tech clothes. There is nothing special about the semiconductor industry that justifies subsidies. This is just wasteful pork-barrel politics as usual. Unfortunately, wasteful pork-barrel spending is the one thing that seems capable of getting bipartisan support in Washington these days.’

Only…by the time the story made its way to The Wall Street Journal, the cost of the program had exploded, the way Washington’s boondoggles tend to do: ‘The Senate approved a $280 billion bill aimed at boosting the semiconductor industry crucial to modern technology’…

The idea is to set up 20 regional manufacturing ‘hubs’. And they’re supposed to be in areas where people are relatively poor and disadvantaged.  

In other words…one of the most vital products of sophisticated machinery is to be made in areas with no substantial manufacturing base…by people who weren’t very good at making anything else! Of course, this kind of central planning never works…but maybe this time it will be different.

As with all government boondoggles, the costs fall on the many. The benefits, if there are any at all, go to the few. And the few who will score big from this one are those who promise to improve the US’s national security, by manufacturing little silicon wafers.  

Can they actually make the chips in the US to a competitive standard in cost and quality? Probably not. If we could, we would be doing it already. And if government really could ‘invest’ profitably…we might have US$30 trillion worth of dividend producing assets, rather than US$30 trillion worth of dead-weight debt.  

Spooky money

But empires need enemies. China is a good one. It’s big. It’s powerful. And it’s a plausible candidate to replace the US as the world’s number one hegemon.

The whole military/industrial/media/academic/think tank/surveillance complex is all aflutter over the possibilities — hundreds of billions’ worth of new weapons…research and analysis reports up the kazoo…and, of course, the aforementioned boondoggles for high tech industries.

And don’t forget the spooks. Already, FBI agents are looking under the beds for Chinese agents. The Wall Street Journal was on the case last week: ‘China tried to build a network of informants inside the Federal Reserve System’…

Oh those wily, inscrutable, clever Chinese. They’re going to steal the Fed’s secrets…and infiltrate its policymaking…steering it to dumber and dumber policies.  

Excuse us…but we need to take a break to laugh…and catch our breath.

The idea that the Chinese may learn Fed secrets, or pervert Fed policy, is like suggesting that it might be trying to steal Bernie Madoff’s business plan. How it worked was obvious; its failure was inevitable.

Besides, why bother? Want to know something about the US economy? Just go on the internet. There are reams of data...tomes of theories…endless research. Almost all of it free.

All they want

The Chinese can have all they want — all the scientific-sounding formulas, the large numbers, the Greek symbols, and the crackpot theories. The public gets the wrong idea from all this folderol; apparently, the Chinese do too. People think the Fed team are like nuclear engineers…or maybe surgeons. They believe the Fed must have expertise…some tricks…some gnostic awareness — above and beyond normal humans — that enables them to pull the right lever at exactly the right time. That’s why the mainstream press refers to Powell’s ‘skill’ as a central banker that will be needed to avoid a recession.

But Mr Powell has no known skill. And he has only one thing to work with — liquidity, both cash and credit. He adds it. Or subtracts it. Everything else is detail. And if he had any idea of what he was doing he wouldn’t have been adding liquidity when the economy was entering an inflationary cycle…and wouldn’t now be 750 basis points ‘behind the curve’. He’d be ahead of it…inflation would be under control…and he could lower rates when the economy goes into recession.  

But here’s Senator Rob Portman, missing the point completely:

‘I am concerned by the threat to the Fed…the broad threat from China to our monetary policy. The risk is clear.’

Risk? If the feds were really afraid of Chinese competition, they’d give them keys to the Fed’s inner sanctum…and hope they would learn all they could.

Regards,

Bill Bonner,
For The Daily Reckoning Australia