Our ‘Trump Trade’ is far from over

  • What transition?
  • Best stock buys
  • ‘Deep State’ hits back

Almost everywhere we look, we read the same thing: the ‘Trump Trade’ is over:

‘Dollar tumbles as Trump trade fizzles’ — News.com.au

‘Euro zone bond yields tumble as Trump trade suffers setback’ — Reuters

‘Dollar, bonds and more: “Trump trades” are unravelling — fast’ — MarketWatch

‘Trump Trades Show Signs of Cracking on Fiscal-Stimulus Letdown’ — Bloomberg

We have no idea what they’re talking about.

Maybe their ‘Trump Trades’ are fizzling, tumbling, unravelling, and cracking, but our ‘Trump Trade’ is alive and well. And we expect it to be so for the foreseeable future.

For four years, in fact. Maybe eight, if you get my drift!

Details here.

Markets

Overnight, the Dow Jones Industrial Average fell 63.28 points, or 0.32%.

The S&P 500 fell 4.88 points, or 0.21%.

In Europe, the Euro Stoxx 50 index lost 21.24 points, for a 0.64% fall. Meanwhile, the FTSE 100 gained 0.03%, and Germany’s DAX index fell 1.07%.

In Asian markets, Japan’s Nikkei 225 index is up 129.78 points, or 0.68%. China’s CSI 300 is up 0.39%.

In Australia, the S&P/ASX 200 is down 45.65 points, or 0.79%.

On the commodities markets, West Texas Intermediate crude oil is US$53.10 per barrel. Brent crude is US$56.10 per barrel.

Gold is trading for US$1,194.25 (AU$1,595.33) per troy ounce. Silver is US$16.70 (AU$22.31) per troy ounce.

The Aussie dollar is worth 74.86 US cents.

What transition?

A house price crash. Sick of us writing about it?

Get used to it.

We’ve slowly moved back to the subject over the past year or so. That’s after giving up on the matter for a good three years.

It’s good to take a break.

With the benefit of hindsight, it was a good move. House prices didn’t crash. So writing about the possibility for three years really wouldn’t have helped much.

But why are we getting back on the subject now?

One of the things we remember with our last dalliance with the subject of falling house prices, was the argument that house prices wouldn’t collapse because…it was the rich and well-off who had most of the debt.

To us it was a nonsense argument.

As a visit to any bankruptcy court will inform you, the ‘rich’ and ‘well-off’ have more than their fair share of financial problems.

Furthermore, we saw it as a negative. If it was true that most of the debt is in the hands of the few, that’s a major risk. It’s the equivalent of having either a balanced portfolio or a lop-sided portfolio.

A lop-sided portfolio can do incredibly well if you back the right stocks. But if you back the wrong stocks, or if the market turns sharply, the lop-sided portfolio may receive a bigger hit than a balanced portfolio.

When the market is going up, it’s just fine to have a concentration of risk. Hungry borrowers will borrow, and willing bankers will lend.

But what happens when the market turns the other way? Especially in ‘trophy’ suburbs, where the rich and well-off seem to congregate? Well, then it may not turn out so well.

But what does it matter? The housing market isn’t about to fall, and therefore the rich and well-off won’t get into financial trouble, right?

Maybe that’s not right. As an article from the Australian Financial Review reveals this week:

Property buyers in some of the nation’s swankiest suburbs are among those under most stress keeping up mortgage repayments, according to an analysis by postcode of income and debt levels.

The young affluent in plush inner suburbs living the high life are more likely to be financially derailed by rising costs than battlers in new estates on the suburban outer fringes, the analysis reveals.

Households in Melbourne’s gilt-edged Toorak, about 8 kilometres south-east of the central business district, where median house prices are $3.5m and $845,000 for apartments, are five times more likely to default on mortgage payments than the national average.

It’s the same probability in Bondi, about 8 kilometres south-west of the central business district, where median house prices are about $2.5m for a house and $1m for an apartment.

Oh dear.

Naturally, it will take more than one big-time default in a plush suburb in order for house prices to crash.

But the truth is, it’s not so much the actual default levels, or even extrapolations about what they could be in the future. The point of most interest is that the data reveals the Australian economy can’t be in as good shape as most folks think.

The almost constant refrain we see from so-called market experts is that the Aussie economy is transitioning well. It’s moving from a resources-based economy to a services-based economy.

Nice. If only it were true. But it isn’t necessarily so. Not based on the numbers supplied by the government’s Austrade. Check out the following chart (note, the annotation is from the original):



chart image

Source: Austrade
Click to enlarge


The chart on the left plots commodity and other physical exports. The chart on the right plots services exports.

Based on the latest numbers, Australia exported $250 billion of merchandise in the year to September 2016. For the same period, Australia exported $66 billion of services.

As a percentage, services accounted for 21% of exports.

Roll the clock back to January 2009. Australia exported $225 billion of merchandise during the prior year. For the same period it exported $52 billion of services.

As a percentage, services accounted for 19% of exports.

Go back further, to January 2005. During the previous year, Australia exported around $120 billion of merchandise. For the same period, it exported around $37 billion of services.

As a percentage, services accounted for 23.5% of exports.

And if we go back to the beginning of the chart in 2001, for the previous year, Australia exported around $112 billion of merchandise, and for the same period it exported around $35 billion of services.

As a percentage, services accounted for 23.8% of exports.

Our point is, we fail to see exactly how Australia’s economy has transitioned at all. As far as we can see, the make-up of the Aussie economy has been fairly constant for the past 16 years.

Commodities and other goods account for between three-quarters and four-fifths of exports. Services account for the remainder.

If the Aussie economy really is switching from a commodities exporter to a services exporter, all we can say is that it has a blooming long way to go.

Because, even though service sector exports have nearly doubled over 16 years, merchandise exports have more than doubled…even after the last three years of decline.

And in nominal dollar terms, service sector exports are way, way behind — $65 billion, against $250 billion for merchandise.

We ask: where is the growth going to come from for services to take on the role as a major economic driver?

We don’t see it. The kind of services Australia specialises in are difficult to export (coffee shops, education, and lawn mowing services for example). And where they can be exported, they face intense competition.

This brings us back to housing. What is the profile of the ‘affluent young’ in Toorak and Bondi? Are they mining executives who are struggling to make ends meet after the downturn?

Or are they services industry executives who are struggling to make ends meet after failing to achieve the breakthroughs and growth they expected?

Or are they from both groups?

We don’t know for sure. But if we’re right about the direction of the Aussie property market (down), 2017 could be the year when we find out.

Best stock buys

But as always, why worry when Australia’s ‘best’ investment minds say the economy and market is in for another terrific year?

You can check out this video from the Australian Financial Review. Be warned, it’s deathly dull.

We did agree with one part of it. That was the bit about investing in small-cap stocks.

Contrary to conventional wisdom, we actually like the idea of investing in small-cap stocks during volatile and risky markets.

With small-caps, you only have to (and only should) allocate a small amount of cash to each position. If the market and the small-cap stock fall, you won’t lose a big chunk of your money.

But if the market soars, and assuming small-cap stocks soar too, your returns could be much greater compared to owning blue-chips.

Of course, there are a lot of variables when it comes to stocks and the markets. Sometimes, like in late 2012, the broader market can rise while small-caps fall.

But we see that period as a relative anomaly, as a result of the search for yield. Today, we’re cautious about the market. But we’re always looking for great investing opportunities.

To our mind, some of the best opportunities are in small-cap stocks.

‘Deep State’ hits back

Donald Trump continues to get into trouble, if you believe the mainstream. As the Financial Times reports:

An escalating civil war between incoming president Donald Trump and the US intelligence community is presenting America’s spies with their biggest crisis since the failures in the run-up to the Iraq war.

By blaming intelligence agencies for the possible leaking of a dossier detailing alleged efforts by the Kremlin to cultivate and compromise him and likening it to “Nazi Germany”, Mr Trump has opened a new offensive against officials who pride themselves on their non-partisan professionalism.

“This is the first time that I know of where a president has accused [intelligence agencies] of having a political position…and that really challenges the industry that works very hard to be non-partisan,” said Cortney Weinbaum, a former intelligence officer now at the Rand Corporation.

No US politician has dared speak out against the intelligence agencies, not after what happened to JFK.

But anyway, the more important aspect here is that you’re seeing the work of the ‘Deep State’ at play. To the ‘Deep State’, Trump is an outsider.

The ‘Deep State’ is afraid of outsiders…especially when they encroach on the ‘inside’.

As Glenn Greenwald puts it at TheIntercept.com:

In January, 1961, Dwight Eisenhower delivered his farewell address after serving two terms as U.S. president; the five-star general chose to warn Americans of this specific threat to democracy: “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.” That warning was issued prior to the decade long escalation of the Vietnam War, three more decades of Cold War mania, and the post-9/11 era, all of which radically expanded that unelected faction’s power even further.

This is the faction that is now engaged in open warfare against the duly elected and already widely disliked president-elect, Donald Trump. They are using classic Cold War dirty tactics and the defining ingredients of what was until recently been denounced as “Fake News.”

Their most valuable instrument is the U.S. media, much of which reflexively reveres, serves, believes, and sides with hidden intelligence officials.

Greenwald is 100% correct. It’s the same attitude towards the military and police. The mainstream adores both. The mainstream is afraid to say or write anything it fears may be viewed as disrespectful to those ‘who serve’.

Or rather, those who are supposed to serve, but who instead have become people the ordinary citizenry must now revere and adore.

This is the ‘Deep State’ at work. And it’s at work right here in Australia too. Our expose reveals how.

Cheers,
Kris