What gold and shoes say about the economy

  • ‘Halo stocks’ of the year
  • Tacos and gold
  • Trump happened…
  • Lies, damned lies and statistics
  • More to the problem than wage growth
  • Is Amazon really a threat?

I just received an email from Kris. He asked me to share this with you:

Hi Shae,

Sorry to butt in. I know today is your day to bash out Port Phillip Insider, but this is too important for me to wait until tomorrow.

It’s the whole “halo stocks” thing. I need to make it clear to our subscribers. “Halo stocks” aren’t divine. They don’t have magical or mystical powers.

And you won’t find Papa Francesco preaching about them from the window of his apartment at the Vatican!

But it’s important folks know that there is something about “halo stocks” that at least make them special.

The rarity of them has something to do with it. But there’s more to it than that. These stocks are one of the few types of stocks that investors associate with life-changing wealth.

Gold stocks…tech stocks…“halo stocks”.

That’s just about the extent of the list. Anyway, I was doing some digging around this morning, and came across this. Please share it with PPI readers today:

  • Halo Stock #1 – 602.5% gain in 11 months
  • Halo Stock #2 – 297.5% gain in 7 months
  • Halo Stock #3 – 182.5% gain in 6 months
  • Halo Stock #4 – 135% gain in 10 months
  • Halo Stock #5 – 120% gain in 7 months

That’s just the beginning. I’ll share more examples like this tomorrow. I just wanted to give you and the readers a heads up.

Cheers,

Kris

There you have it. As instructed, message delivered.

Tacos and gold

After strolling in home from a late-night taco run, I took a final look at the spot gold price before bed.

My reliable indicator for market trouble didn’t let me down.

Around 10:00pm last night (8:00am New York time), the gold price climbed from US$1,247 to US$1,259 an ounce by half past midnight. You can see this by the lightly shaded area in the chart below:



chart image

Source: goldprice.org
Click to enlarge


This only represents a 0.96% climb. But a US$21 jump in the spot gold price in a couple of hours instantly told me something was going on.

What happened? I’ll explain below. First, a look at the markets.

Markets 

Overnight, the Dow Jones Industrial Average fell 372.82 points, or 1.78%. 

The S&P 500 fell 43.64 points, for a 1.82% drop. 

In Europe, the Euro Stoxx 50 was down 57.06 points, or 1.57%. Meanwhile, the FTSE 100 dropped 0.25%, and Germany’s DAX index lost 1.35%. 

In Asian markets, Japan’s Nikkei 225 is down 330.60 points, or 1.67%. China’s CSI 300 is down 0.26%. 

In Australia, the S&P/ASX 200 is down 68.82 points, or 1.21%. 

On the commodities markets, West Texas Intermediate crude oil is US$48.97 per barrel. Brent crude is US$52.09 per barrel. 

Gold is trading for US$1,259.30 (AU$1,689.92) per troy ounce. Silver is US$16.88 (AU$22.65) per troy ounce. 

The Aussie dollar is worth 74.52 US cents. 

Trump happened…

So, why did gold spike higher and markets tank?

President Trump rattled the markets.

Whispers abound that Trump tried to interfere with an FBI investigation.

Trump sacked FBI director James Comey last week. But the stock market decline on Wednesday appears to be on the back of growing calls for an impeachment.

I’ll be honest, I know very little about international politics. But even I can work out that a lynch mob calling for a hanging is bad news for markets.

US markets did what they do best overnight, wobbling from incredible ‘definitely-not-an-asset-bubble’ highs. And the panic made its way to gold, pushing the spot price up in less than three hours.

The Dow and the S&P 500 falling only 1.78% and 1.82% respectively is a mere rattling of the cage for investors. But is this the start of something bigger? A less than 2% fall shouldn’t spook you, but now might be the time to assess everything you thought you knew about the global economy and markets.

Lies, damned lies and statistics

Ever thought the government would make up numbers? Right…me neither…

Late yesterday afternoon, I was trawling through data on the number of smokers in Australia.

Over at the Tobacco in Australia website, at the very top of the page telling you about the damage smoking causes, it reveals that smokers cost the Aussie economy $32 billion. To put that figure in perspective, that’s the exact same amount Australians owed on credit cards in January this year. 

I discovered the $32 billion figure was based on a report compiled for 2004/05. In other words, the figures are 13 years old.

Hey, if it ain’t broke, don’t fix it!

Another report stated that smoking has an intangible cost of $19 billion. But it doesn’t provide the methodology to show how they got the figure.

Using the Reserve Bank of Australia’s calculator, $19 billion in 2004 would be the equivalent of $25.64 billion in 2016. So the number didn’t come from rising inflation.

However, these numbers set off someone else’s bull-dust detector. Combing through several documents, Nick Cater, a columnist at The Australian, called the government out on number-fudging, writing:

The net cost of smoking to the health system is therefore $318.4 million, a figure that hardly makes a dent on the $8.85bn the government was expecting to collect from smokers this year, even without the additional revenue from the proposed excise increase.

The calculations get more incredible. The authors say absenteeism and workforce reduction costs the economy $5.75bn a year. A net loss of $8bn is attributed to a reduction of unpaid household labour. A dubious $3.6bn is included as the cost of resources used in the manufacture and distribution of tobacco products.

By far the largest and most speculative component is $19bn in “intangible costs”, the hypothetical cost of pain and suffering and the “valuation of life” — an estimate of the loss of productive capacity from a premature death.

Look, we know what the long-term effects of smoking are. That’s not up for debate. Yet the official numbers look pretty wobbly. As if the government massaged them to suit their own agenda.

Which they wouldn’t do, would they?

I bring this up because credit agency Standard and Poor’s is poking holes in a whole bunch of other official government ‘data’. The ratings agency confirmed Australia would retain its AAA credit rating, but maintains that it’s on ‘negative watch’.

The latest federal budget is part of the concern. The government announced that wage growth would reach 3.75% by 2020…and go some way to ‘plugging’ the budget deficit.

Morrison got a little defensive at the statement from Moody’s, saying: ‘As Treasurer, I would be talking to the ratings agencies early in our term, talking them through our plans.

You do that Scotty. Sit them down and explain your plan and just how far detached from reality it is.

The Treasurer has the deluded confidence of a baby learning to walk. He backed up the Reserve Bank’s wage growth numbers and said he was confident wages would start growing again once the economy completed the transition out of the mining boom.

We won’t hold our breath…

More to the problem than wage growth

The bad news for policymakers didn’t end with the fanciful wage-growth figures.

Standard and Poor’s also questioned the sustainability of Australian house prices. Noting our AAA credit rating may only be maintained if there is a ‘meaningful moderation’ in housing and credit supply:

A stabilisation of the ratings would also require a meaningful moderation of the credit and house price boom.” S&P statement said

A strong fiscal position is required to offset Australia’s weak external position. It is also needed to allow for a strong buffer to absorb the fiscal consequences if the ongoing boom in the credit and housing market were to abruptly end.

The fast and sustained growth in credit and house prices will increase risks to fiscal accounts, real economic growth, and financial stability.

I take this sort of insight from ratings companies with a grain of salt. Most are terrified they’ll miss out on calling the next financial crisis.

The reality is that the cost of housing in Australia is a very real problem for many Australians. And should economic data worsen, we may finally get to see where the cracks in the housing market are. Part of the Aussie house price problem is that consumers won’t spend.

Is Amazon really a threat?

There’s a big hurrah around Amazon Inc. [NASDAQ:AMZN] landing in Australia. Much of the mainstream attention is focused on the ‘threat’ to Aussie retailers. It’s somewhat of a menacing message they’re sending, isn’t it? ‘Amazon is coming and it’s going to ruin you’ seems to be the general tone of editorial content on the subject.

This position was validated by Blomberg overnight, claiming Wesfarmers Inc. [ASX:WES] pulled the Officeworks initial public offering (IPO). Back in February, Wesfarmers announced they were looking to raise $1.5 billion from the IPO.

With Amazon confirming they were launching in April, this has probably contributed to the IPO halt. Retailers such as Officeworks, Harvey Norman Inc. [ASX:HVN] and JB Hi-Fi Inc. [ASX:JBH] are likely to be vulnerable to Amazon. Anything electronic can easily be purchased online.

The thing is, I’m not entirely convinced Amazon will be the immediate threat to the retail industry most seem to think.

Sure, it could savage the share price of electronics retailers…but Australians are a hard bunch of people to change.

Only last year did we finally spend over $20 billion online. This accounts for just 6.8% of the total $296.9 billion in bricks and mortar sales. We aren’t natural online shoppers.

However, I do think Amazon will change the landscape of Australian retailing.

Look, I’ve been a huge advocate of online shopping since the turn of the century. But the problem is that the ordering experience in Australia is clunky.

Part of Amazon’s international appeal is the speedy delivery. Assuming Amazon can replicate that here, this will force Aussie online retailers to change their ways to keep up.  

Few Australian retailers place importance on an efficient delivery process.

Myer Holdings Ltd [ASX:MYR] asks you to allow 4–7 business days for delivery. It’s a similar story for Target, owned by Wesfarmers. Premier Investment Ltd [ASX:PMV] is one of the few companies that understand Aussies want quick delivery. Even then express post still has a delivery window of 1–3 business days.

Ordering your weekly shopping online isn’t much better. Both Coles and Woolworths Ltd [ASX:WOW] need an order before midnight if you want something delivered the next evening.

I’m not convinced Amazon will crush the Aussie retail industry like the majority suggest. But I do reckon we could suddenly be looking at much better delivery times across the board due to their arrival.

In saying that, the problem for the retail sector isn’t Amazon.

The problem is the retail consumer. Quite frankly, we have less money to spend.

Wage growth is incredibly low, at 1.9%. Because I don’t trust government statistics, Roy Morgan has their April 2017 unemployment figure at 9.3%. Their underemployment (people who work less hours than they want to) is at 8.3% for the same period.

According to the Australian Financial Review, it takes 27.9% of the monthly wages of an average two-person household to meet their mortgage repayments.

And regardless of what the consumer price index says, grocery shopping is costing you marginally more each week.

The point is, inflation isn’t showing up in official figures. But it does show up in your bank account.

The retail industry has hit the point where there is a very clear difference between buying essentials and non-essentials.

When you look closely, things look pretty glum for the retail industry:



chart image

Source: Business Insider Australia
Click to enlarge


This is why I don’t think Amazon spells doom for the Aussie retail sector. It’s already doomed because we aren’t spending money on discretionary items. The massive drop in discretionary spending should be setting off alarm bells here.

Pay attention to this sort of data. The retail sector will give you hints as to how the Aussie economy is faring.

The March decline in the chart above tells us there are terrified consumers out there, and that should make you wary.

Does this signal what Vern Gowdie calls the ‘End of Australia’? It might. And you’d be wise to prepare for it. You’ll find all the details here.

Kind regards,
Shae Russell