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Turn left or turn right?

18 June 2020

written down by Black Swan

So where to now for the Market?

Admittedly I haven’t been a slave to the screen this week, but it looks like a damp squib few days.  Even Trump has behaved (to his very low benchmark).  Only the Victorian Premier tried to spice it up with a crack at SA.  Classic diversion tactics taken from Trump’s playlist.

I did mention recently that Stock Brokers were all idiots.  Well not all…

Chatting yesterday to one such broker he made two very intelligent and profound statements.  Firstly that the Crow’s were a shit football side – fair admission for a die-hard fan.  Secondly he made the assessment that the Aussie share-market does not believe it will be a speedy economic recovery and that it will be a long hard slog ahead.  The Market wants to fall but every dip is seen as a buying opportunity – supported but a truck load of cash sloshing around the system.  That point is key, and as mentioned here recently – if you don’t but shares what to you do with your cash?  Are the casinos open again yet?

At least if Casino’s aren’t open, clubs are opening up.

The big data in Oz that will get the treatment in an hour or so is employment figures.  A negative 125k is expected, and unemployment to hit 7.0% from 6.2%.  Of course these numbers a year ago would have been catastrophic.  In the current “world” those figures will be seen as not too bad.  Unless you are part of the 7% or 125k to have got the rissole.

USA remain fruit cakes.  Despite not really being on top of Corona/Black Lives Matter/Politics/Guns/Religion, they reckon a V recovery is on the cards.  Retail Sales earlier this week, had the highest jump in history..albeit after the quickest fall in history.  As for me, still not yet a believer.

Thus the main point of today – why does it matter what those loonies over there (I mean in the USA, not Victoria) think or do?

What if they cock this up – which is very likely what will happen.  Chart below shows Aussie 5 year swaps in grey against the same US instrument in red.

Despite our yields being almost exactly the same at present, they are still the BIG DOG that sets direction and momentum.  We follow like obedient puppies.  Thus it is very important that we listen to the loonies.

So let’s do a “what if” scenario.  I am a CEO/CFO of a large Aussie company with a truck load of debt. What would I do?  Firstly be very pissed off that I have got anything set at a fixed rate, because invariably it is out of the money aka underwater.  If I could hussle my Bank to give me tenor (time) I would restructure the shit out of anything fixed to lower my interest costs.  If I was 100% floating do I fix anything now?

Below is the current premium to fix.  Ten year swap in blue, 3 year swap in green and 90 day bill in Freo purple.  Cash is there in orange.  This chart is not “interbank” but what I reckon a fairly good borrower should be getting (pre  risk margin).  What struck me is that you can “fix” for 10 years now at a level below where “emergency” RBA cash levels were a year ago.  Is that not spectacular value?

How low, long can yields remain down here?

But here is the rub.  Who wants to pay at 1% more for fixed debt at present versus floating?  Secondly – what catalyst will it be to get RBA to hike cash rates next?  Most likely the answer to that is inflation sustainably above 2% and unemployment in the low 4%’s.   The real risk is that I may not live that long to see those two numbers, and if I was a CEO/CFO I don’t want to join that 7% of unemployed by making a gamble that doesn’t pay off.

But the world of finance is more than just “raw” rates.  So more of that next week.  Maybe a glimpse at Bank’s internal funding costs that these days is a higher cost to a borrower than Bank Bill rates.

The Aussie dollar remains just under 69 cents and doesn’t look fussed about moving anywhere in a hurry.

Until next week, party like its 1999.

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The Man