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2023 Edition #3 or 1A ? Hurts me more than you.

8 June 2023

written down by Black Swan

Big Picture

I could claim strategic and technical errors for delay, but truth is the market has me quite confused at present.

A bit like the ABC getting abused for being too left and being abused at the same time for being too right, I’ve been told I’m being too pessimistic on the market in the last issue…and too optimistic.

So :

The ASX is up 4% year to date, yet my portfolio is off by near 10%. Not helped by my bank stocks that are wobbly in the knees – see later.

I would have suspected a bigger uplift in market mood following the successful passage of the US debt ceiling. I suppose no one expected anything different, but I did see a risk that the GOP would rather see the whole house burn down than pick up a bucket of water.

Of course Trump’s legal battles continue to mount. If nothing else he is a “fighter” – still the favoured candidate for the Republican’s 2024 Presidential bid. His supporters are so welded on now that no convictions would change their minds. Swing voters must be throwing their arms in the air. Choices are an aged fool or a crooked aged fool.

Bank of America did a survey of large and corporate businesses as to what they see as the biggest credit risk.

US Treasury and US Corporate debt was surprisingly low. Biggest risk is commercial real estate.

Not really one I can comment on, but a number of smarter people also tell me that Aussie commercial property is also likely to be revalued lower. Our REIT’s are down nearly a quarter in value over the last year, yet unlisted trusts are up 5%. Perhaps unlisted trusts just haven’t bothered to get anything revalued…? Also whispers of big discounts to get new tenants into the larger shopping center’s.

So whilst the equities market is not exactly exuberant, it remains pretty upbeat.

Some of this “optimism” is probably justified. USA punters believe that they have the Federal Reserve right where they want them. Any sustainable pain will see immediate relief in rate cuts.

They are probably right, but as we are seeing here, inflation is hard to kill off and may take longer than expected.

The chart below was before the last RBA hike this week but is shows global interest rates in real terms – inflation less cash rates.

It does show USA is getting pretty close to at least rate neutral….and also shows why RBA Lowe really didn’t have much choice.

The surprise one though is Canada – it is the only positive real yield economy – yet they unexpectedly, raised their cash rate by 25 bps this week.

Some media chatter about Russia, China and India plotting a coup to overthrow the US Dollar as the worlds base currency.

Nice theory, but it would be a bloody battle. Chart below sees the greenback losing some “momentum” but most damage was done earlier this millennium.

As I have mentioned many times, it is hard to get a gauge on what is really happening in China. A lot of discussion about it slowing, but Bloomberg shows that there is a least a flurry of human traffic “post” covid.

I have also covered this before, but worth consideration for why I think USA may have passed to point of return for any semblance of sanity. For those that may not know, Greg Abbott is the Governor of Texas.

Domestic Duties

You could almost hear RBA Lowe say “this is going to hurt me more than it is going to hurt you”.

He is going to go out swinging. People do over think the RBA though. To repeat, they have a very simple mandate:

Seek full employment
Keep inflation between 2-3%
Maintain the economy financial stability

Lowe has made it very clear that he sees long term inflation as an unfathomable horror. Whilst the other two mandates are tracking well he will work on inflation.

I have been spruiking the concept of making superannuation compulsory contributions a more flexible process. At present for example if we hiked super deductions from employees you would think it would have a broader based but as effective end result on reducing disposable income for spending. This level could then be lowered as and when required. At least “you” get the value of current pain via higher super balances rather than passing it on to banks.

Concept would need government support but maybe worth canvassing.

In the interim though we only have rates.

House price increases across the board would be annoying Lowe. Not sure if housing building approvals plummeting would see him smile or cry.

The latest import and export figures show prices falling on a yearly basis.

Mortgage servicing costs have now on average slipped past 30% of income levels – always the plimsoll line for keeping the average household above water.

Employment remains strong for now, yet consumer spending is falling quickly.

I have not yet given up on Australia doing a Houdini and avoiding a nasty fall, but the task is looking tough.

The old rule of thumb is that the dip in the blue line (rate cuts) means yes to a recession ahead. But old rules don’t always win.

Recession I hear you say…? Twitter says yes.

Fairfield RSL is both defying recession claims and adding to inflation – $97 for a steak!

Most banks have revised their RBA terminal rate higher. Most are calling for 2 more hikes now….and any cuts to start much later towards the back end of 2024.

I think that forecast sits with me.

CBA data:

Banks

Banks share prices are well below where I think their value is.

Much criticism of banks for the way they manage to bung mortgage rates higher very quickly, but system changes to allow deposit rates to go higher seem to take much longer.

That has long been the case, but the post GFC race by banks to get deposits in the door is long past. Latest APRA figures don’t match with the much hyped of cost-of-living crisis. Bank deposits rose by $100 Billion in the year to April 30 for a total of $1.37 Trillion.

The big four hold the lions share – over $1 T. CBA is holding 45% more deposits that in April 2019.

Home and business loans are slowing so the need for your money is very low at present – so don’t expect deposit “bargains”.

Of course this deposit boom is not shared equally across the board. The lowest income households are raiding the savings cupboard to keep the baked beans on the table.

The much talked about fixed rate mortgage cliff looks to be real – so maybe a few people have been squirrelling deposit nuts away for a dark winter, when monthly payment increases really kick in.

Politicians catch cry is to encourage mortgage holders to “shop around” for the best deal.

The word I’m hearing from HT Capital is that bank servicing calculations are making switching hard. Westpac recently “defied” APRA by lowering their buffer on future interest rates which should help.

The RBA chart below shows that 1 in 5 home loans will not be moveable if two more rate rises does eventuate.

Lastly, the fierce competition for market share for home loans amongst the banks seems to be cooling. Most have pulled their cash-back payments for new loans. Perhaps the reduction in banks interest margins (and resulting share price fall) in profit announcements gave them a hint.

The Aussie Dollar and Commodities

Last report had the Aussie dollar at $0.67 cents. Black Swan and Lady Swan are off to Italy later this year so I will be talking the Euro up from 0.62 to .70 over next few editions.

Hard to see the AUD rise too much from here with commodities flat or falling. FX volatility is at 15 month lows. Next big move is probably likely to be via a falling USD if their economy hits a wall.

Metal prices look marginally better as data is showing China import volumes are rising again.

Politics

Labor passed their first birthday in power recently. Time to cease blaming the previous incumbents. Most agree they were shite – but your job now in government is to fix it. Good steps in some areas, but bugger all in others.

Meanwhile the Coalition are looking less like a rabble – I suppose you can only sink so far. Still an air of rats leaving a sinking ship.

Morrison is believed to have touted a job at PwC in a bid to bail from politics.

Of course this was prior to the latest furor.

I think he would be a perfect match for PwC now.

Housing

Most of my thoughts on housing has already been covered above.

Residential sale price increases in my opinion seem to be primarily a factor of two causes:

The “vibe” is good. House buying is sentiment driven.
Low supply of stock – far less houses on the market than normal.

Claims that is all driven by increased migration seem very over inflated to date.

I think the Greens will “blink” first and support the proposed social housing policy.

Meanwhile the wheels are still off for people looking for rentals.

Crypto and Gold Land

Crypto prices appear to have largely plateaued after a very strong run earlier this year.

Other than that I know as much about recent blockchain events as I do about how this iceberg came about. If you were a fan of retired English cricket umpires, maybe you could name it Dickie-Berg.

For those that love reading more about “mining” bitcoin, the report below covers one of the big issues with this asset base, and a proposed alternate approach (that seems unlikely to ever work)

“A 2022 report, titled Revisiting Bitcoin’s Carbon Footprint, conducted by climate and economics researchers across Europe estimates that “Bitcoin mining may be responsible for 65.4 megatonnes of CO₂ per year … which is comparable to country-level emissions in Greece (56.6 megatonnes in 2019).”

Gold was on an absolute fly when it topped $2,000USD an ounce. It has since fallen back big time.

If I understand the chart below it expects the following:

Inverted yield curve will lead to recession
Recession will see S&P equities (and USD) fall
This will see in relative terms that gold increases in value.

ESG and Carbon

I remain pretty bullish on lithium prices. Prices did get a little frothy into late 2022, and a general slowing of Chinese EV demand and manufacture saw prices head south very quickly.

The bigger play is where it will come from in coming years.

Despite Australia having the second largest reserves we rank very low in production and export so far.

Chile is the BIG dog in this fight – see below:

So it is also BIG news when Chile announced that they intended to nationalise all lithium mines and contracts going forward.

Chile’s President Boric sees this as a once in a life time opportunity to maximise his country’s potential return.

This is a windfall for Australia as investment dollars are sure to follow to us in the wake of that announcement.

The NBN rollout shows the very reason why governments should stick to their key utility deliveries.

On the flipside, I also would also encourage our Federal Government to do things better/differently than we achieved for our past iron ore and coal exports to also make sure everyday Aussie battlers get a slice of what will be a big and tasty cake.

Lastly, for the many that say that the dollar costs to “chase” renewables is unacceptable I have a challenge.

Unless you are true flat earthers and totally deny science, then what is the acceptable costs of inaction?

Is $8 billion (above normal) for NSW/ACT bushfires acceptable? What about another $12B (extra) for NSW floods? That sort of money could seriously make a difference.

Drinking favourite…

There has been a lot of good wine drunk since last issue – mainly appreciated and forgotten.

I’ll go with a bottle drunk last night.

For any South Aussie, or interstate reader that hasn’t visited McLaren Vale’s Samuels Gorge – do yourself a favour. Great cellar door and great wines.

The one we had was the 2017 Kaleidoscope Horizons. Unusual blend of grenache, graciano and tempranillo. Latest release at $80 a bottle.

Brilliant paired with Greek lamb.

9/10

Listening to…

Been watching a bit of a Netflix series Sky Rojo lately. A bit on the raunchy side – wait until the kids are in bed.

Spanish series, but music impresses me as well. This one I had never heard of. Yatra is actually Columbian. A lazy 27 million listeners on Spotify, so I gather he is popular.

Cheers.

Feedback always appreciated…

If you want to write a piece – long or short, drop us a DM.

(written down by Black Swan)

Cheers, BS

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