Failed to Stimulate

Friday, 11th March, 2016
Albert Park, Australia
By Kris Sayce

 

  • Much safer now!
  • What’s to show for it?
  • This won’t be the end
  • Neither one nor the other
  • Prices…crash?

 

Ugh!

The markets are so boring these days. I remember the good old days when bad news was good news, good news was bad news, and really bad news was really, really bad news.

Those days were great. Central bankers only had to release a whiff of the smell of money printing and interest rate cuts, and the market would go mental.

But what happens now? It seems that nobody could care less…despite the decision by the European Central Bank (ECB) to cut the benchmark interest rate to zero from 0.05%…to cut the Eurozone deposit rate to minus 0.4% from minus 0.3%…and to increase the ECB’s money printing program by 20 billion euros, per month.

ECB president Mario Draghi told reporters:

It’s a fairly long list of measures, and each one of them is very significant and devised to have the maximum impact in boosting the economy and the return to price stability — we have shown we are not short of ammunition. From today’s perspective, we don’t anticipate it will be necessary to reduce rates further.

The market reaction?

The one-day chart of the Euro Stoxx 50 index tells the story:


Source: Bloomberg

click to open in a new window

The market loved the news so much, that after climbing as high as 3.6% over the previous day’s close, the index closed the day down 1.5%. That’s more than a 5% trading range.

It’s a wonderful experiment, this money printing and low interest rate lark.

So wonderful, folks are buying gold by the bucket load. Today, the gold price is trading at US$1,277. And if the money printing continues, we only expect it to go even higher.

Markets

Overnight, the Dow Jones Industrial Average rallied all afternoon to close down just five points, or 0.03%. By the middle of the trading day, it had been down as much as 1%.

The S&P 500 index closed up 0.31 points, or 0.02%.

In Europe, the market plunged into a state of disappointment. The Euro Stoxx 50 index closed down 1.5%.

The FTSE 100 index closed down 1.8%. Germany’s DAX index lost 2.3% for the day.

In Asian markets, the Nikkei 225 is currently down 0.9%, while the Shanghai Composite index is down 1%.

On the Aussie market, the S&P/ASX 200 index is up 7.5 points, or 0.15%.

In US dollars, gold is trading at US$1,277, and in euros it’s trading at 1,140 per ounce. It remains near its highest level since early 2013.

Which neatly brings us back to Europe. Just what impact has ECB president, Mario Draghi’s policies had on European markets? Let’s take a look…

Much safer now!

Perhaps no other illustration will show you just how desperate things are in Europe than the table below:


Source: Bloomberg

click to open in a new window

The important column is the one containing the blue numbers. This shows you the current yield on two-year government bonds for Eurozone economies.

These are in ascending order from the lowest rate at the top to the highest rate at the bottom.

It probably won’t surprise you to see that Greece pays an 8% yield on its two-year government bonds. After all, only last year the Greek banking system was on the precipice of collapse.

So that’s fine. I don’t have a problem with the Greek two-year bond yield.

But now I want you to consider something else. Think back to another fairly recent event, where not one, but several European economies were on the edge of disaster.

Does the acronym PIIGS ring any bells?

That was the crude way of labelling five of the Eurozone’s more troubled economies: Portugal, Ireland, Italy, Greece, and Spain.

Again, think back. Remember the worry and the trouble that these economies were causing. To take one example, the yield on Portugal’s two-year bond soared higher than 18%.

You can see that in the chart below:


Source: Bloomberg

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But what does a Portuguese two-year bond yield today? It yields a breathtaking 0.611%.

An investor could go into the market today, and pay 108.48 euros per bond. Then, over the next two years, they would receive an annual coupon of 4.45% on the face value security of 100 euros.

In June 2018, the ‘lucky’ investor would get their 100 euros back, and not including transaction costs, they would be able to book a profit of 61.1 cents for each 100 euro face value bond.

That’s a ripper of a deal!

But if you’re worried that a yield of 0.611% implies too much risk, perhaps you’d prefer something [cough] a little safer. Here’s how the yields stack up for our other PIIGS bonds:

  • Ireland -0.324%
  • Italy -0.057%
  • Spain 0.003%

Don’t be fooled by Spain paying a positive yield. It was negative…until late in yesterday’s trading session. You can likely expect Spain to re-join the ‘negative interest rate club’ soon enough.

What’s to show for it?

All that money printing.

All those low interest rates.

And what does the Eurozone have to show for it?

Economic growth that’s barely struggling to stay above zero.

Good work guys.

This won’t be the end

Oh, and remember Draghi’s carefully worded comment about the necessity for further rate cuts? He said, ‘From today’s perspective, we don’t anticipate it will be necessary to reduce rates further.

In other words, if things get worse, and they have a different ‘perspective’, more interest rate cuts are still on the cards.

Stop, that’s enough

In other news. From today’s Australian Financial Review:

Every dollar from a rebound in the iron ore price will be used to reduce the deficit, not spent on election bribes or boosting what are now looking to be meagre tax cuts.

Ha, ha, ha. Stop it. Enough. Ha, ha, ha.

Enjoy the bounce

If Aussie iron ore miners and the government are hoping for a boost from higher iron ore prices, they’d better act fast.

We’ve seen the future shape of a chart like this before — US$40 here we come.


Source: Bloomberg

click to open in a new window

Neither one nor the other

Our tech expert, Sam Volkering chips in. It’s nothing to do with low interest rates or iron ore, it’s arguably more interesting than that.

Here’s what he wrote to me this morning:

The US Government, IBM, Harvard University, and University of Sydney. Here are four examples of projects working towards quantum computing – all built by one man looking to change the world.

These giant, multi-million dollar rooms, run at micro-controlled temperatures all house the next generation of supercomputer. Except it’s not supercomputing, its quantum computing. Quantum computing is the next major leap forward in science and technology.

The work underway now is like the work from the 70s that helped usher in the PC revolution – except this is bigger, much bigger. Very soon quantum computing will be a reality and it’s going to radically accelerate the technological advancement of the world.

Research projects like the Nanoscience Hub at the University of Sydney is proof that the game is about to change with usable, functional quantum computing. Everyone that understands what’s happening here is blown away by its potential, everyone else simply doesn’t understand what’s going on – and will completely miss the boat.

Quantum computing will flip everything you know on its head and it could create the biggest wealth eruption for investors there has ever been in history.

Sam’s referring to a report in The Age, talking about Sydney University’s plans for a ‘Nanoscience Hub’.

And a central part of this ‘hub’, is quantum computing.

What is quantum computing exactly? To be honest, it all sounds way too complicated for a ‘computard’ like your editor to understand.

The best visualisation that we’ve found to explain it (in really simple terms) is that in standard computing, data is expressed as a bit.

As a binary bit, it’s either in a state of ‘1’ or ‘0’, but never anything in between.

In quantum computing, you have a ‘qubit’. A qubit is quite different from a bit as it doesn’t have to be ‘1’ or ‘0’. It can in fact be both…or neither…or something in between.

If you visualise a ‘bit’ of data as a globe, it will always be either at the ‘North Pole’ or the ‘South Pole’. It can’t be both or anything else.

But a qubit could be simultaneously at each pole, or it could be in the middle, the edge, or all over.

I know, that’s probably blown your mind. Or maybe you’re wondering, ‘so what?’ In simple terms, it has the potential to allow computers to do ever more complex things at faster speeds.

Sam has been banging on about quantum computing since I first met him three years ago. He’s just as excited about the prospects for the science now as he was then.

But that’s not the only thing Sam’s excited about right now. There’s a whole world of activity taking place in the tech sector. And if Sam’s right about where it’s all heading, it’s set to result in a huge number of investment opportunities in the months and years ahead.

You can check out more here.

Housing shortage is over

I don’t write much about the Aussie housing market these days. Not since I predicted a 40% drop for Aussie house prices in 2009.

[Licks wounds]

Back then the talk was about a housing crisis, or a ‘chronic housing shortage’ as the mainstream economists liked to term it.

I argued there was no such thing. I argued that there was plenty of housing supply in Australia, and especially in Melbourne.

I even took to task the now defunct National Housing Supply Council for its shoddy theories. One being that homelessness was evidence of a housing shortage.

We chose to point out that one of the leading causes of homelessness is mental illness, and not the inability to afford a three-bedroom house in the inner suburbs.

But anyway, you can imagine the smirk that crossed your editor’s face this afternoon as we chowed down on some all-you-can-eat buffet lunch at the RACV Club in Melbourne’s CBD and read:

Australia’s apartment boom is reaching its crescendo and all cities, except Sydney, will be in housing oversupply by 2017, forecaster BIS Shrapnel has warned.

“In Melbourne the oversupply will be significant, in Brisbane it will be worse. It is an accident waiting to happen,” said BIS Shrapnel managing director Robert Mellor at the group’s six-monthly Building Forecasting Conference.

2017! The Australian housing market is already in oversupply. A housing unit development just a short stroll from your editor’s humble abode has a total of seven ‘For Lease’ signs displayed outside.

There can’t be more than 20 units as part of the development, which was completed nearly two years ago. Just another 10 minutes’ walk down the street, there’s another unit development, which must have upwards of 80 dwellings.

We’ll watch with interest as the ‘For Sale’ and ‘For Lease’ boards begin to appear…and never disappear.

Prices…crash?

And as for house prices, they’re already falling according to the median dwelling price numbers from Core Logic.

At the end of November 2015, the median Sydney house price was $810,000. The median Melbourne house price was $602,500.

The latest numbers as of the end of February?

The Sydney median house price was $730,000. The Melbourne median house price was $550,000.

We’re still wounded after our last brush with the housing bears, so we’ll leave you to draw your own conclusions on where the Aussie housing market is headed next.

Cheers,

Kris

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End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 23 stocks, including CI Resources Ltd [ASX:CII], Intecq Ltd [ASX:ITQ], Redflow Ltd [ASX:RFX], and Webjet Ltd [ASX:WEB].

52-week lows: 13 stocks, including Anteo Diagnostics Ltd [ASX:ADO], Millennium Services Group Ltd [ASX:MIL], and Peet Ltd [ASX:PPC].

Note: The stocks listed above are stocks that hit an intra-day 52-week high or low during today’s trading. The stocks didn’t necessarily close at the 52-week high or low.