Navigating 2019’s investment minefields

Tuesday, 15 January 2019
Melbourne, Australia
By Bernd Struben

  • A ‘tiny’ $22 billion market
  • The next three weeks…
  • ‘Former Labor MP to Fight Explosive Population Growth’

Only two weeks in and 2019 is already shaping up to be a year with plenty of threats…and opportunities.

To take full advantage of those opportunities, though, you need to keep a close eye on the threats. So, let’s address those first.

Perhaps the biggest threat is excess debt. That includes your own debt levels, particularly if you hold high interest credit card debts. Or if you own highly leveraged investment properties that could see their values drop 10–20%…or more.

On a global scale, the world has never been more indebted. Now this story isn’t new. Wealth preservation expert Vern Gowdie has been sounding the debt alarm since 2013.

(Details here.)

But the debt pile just keeps on growing.

Jeffrey Gundlach, the head of investment management firm DoubleLine Capital LP, offered his own warnings this week. He says growth figures out of the US are highly distorted by the nation’s voracious appetite for debt.

From Bloomberg:

Gundlach took part in a round-table of 10 of Wall Street’s smartest investors for Barron’s. He highlighted the dangers especially posed by the U.S. corporate bond market.

Prolific sales of junk bonds and significant growth in investment grade corporate debt, coupled with the Federal Reserve weaning the market off quantitative easing, have resulted in what the DoubleLine Capital LP boss called “an ocean of debt.” …

Gundlach’s forecast for real GDP expansion this year is just 0.5 percent. Citing numbers spinning out of the website, he pointed out that the U.S.’s unfunded liabilities are $122 trillion — or six times GDP.’

I’m pretty good with numbers. But when you trot out debt figures of US$122 trillion (AU$169 trillion) it’s hard to wrap my brain around what that really means.

And that’s just the US, mind you.

Most nations are hip deep in their own debt.

As you know, Australian households are among the most indebted on the planet. That may have been somewhat sustainable when house prices were rocketing higher. But now that they’re heading downhill we could see something known as the negative wealth effect kick in.

The negative wealth effect, if you’re unfamiliar, comes about when people feel less wealthy, in this case due to falling home prices. They then tend to spend less, which impacts various consumer stocks.

As The Australian reports, we may have already seen the first signs of this unfold over the holiday season…

The first cracks in consumer spending could be starting to emerge after Wesfarmers downgraded Kmart’s sales forecast, with its women’s apparel category particularly squeezed over Christmas.

The surprise sales and profit warning from Wesfarmers yesterday for both Kmart and Target comes after outdoor adventurewear and equipment retailer Kathmandu became the first to confess that trading was subdued over the summer.

Consumer durables group Gale Pacific, which owns a popular range of shade cloths and gazebos, also admitted to a slump in sales.

With some 58% of Australia’s GDP driven by consumer spending, this isn’t a threat to be taken lightly. If house prices keep sliding as expected, consumer discretionary stocks could come under serious pressure this year.

Keeping the focus in our neck of the woods (and away from debt-addled European, African and South American nations), you can’t discuss debt bombs without looking at China.

You may have read about the surprise drop in Chinese imports and exports in December. Exports were down 4.4% year-on-year while imports tumbled 7.6%.

The ongoing trade dispute with the US gets some of the blame for the falls. But as Vern explained to readers of The Gowdie Letter on Friday, the real culprit is…you guessed it…debt.

Here’s an edited excerpt from Vern’s update:

Trade friction is only part of the contraction story. The real problem in China is…debt.

There is simply too much of it.

chart image

Source: Bloomberg
Click to enlarge

As stated many times before…”there is no new way to go broke, it is always too much debt”. This truism applies to households, businesses and even the world’s largest economies.

In The End of Australia, I wrote:

“No conversation on Australia’s future would be complete without a look at China. China is what Japan was 30 years ago — a disaster waiting to happen.

“The asset bubble in Chinese housing needs a continuous supply of debt to keep it going. Without a sufficient level of new lending, the housing market will start to fall.” …

Forecasting a slump in the Chinese economy required no great vision. The continuous build-up of debt, sooner or later, has nasty consequences.

If you haven’t read Vern’s market crash survival guide yet, now would be a good time to do so.

You can find out more — including how to get your hands on a digital copy — by clicking here.

Now a look at the markets…


Overnight, the Dow Jones Industrial Average closed down 86.11 points, or 0.36%.

The S&P 500 lost 13.65 points, or 0.53%.

In Europe, the Euro Stoxx 50 index finished down 14.86 points, or 0.48%. Meanwhile, the FTSE 100 dropped 0.91%, and Germany’s DAX closed down 31.55 points, or 0.29%.

In Asian markets, Japan’s Nikkei 225 is up 184.95 points, or 0.91%. China’s CSI 300 is up 1.45%.

In Australia, the S&P/ASX 200 is up 31.83 points, or 0.55%.

On the commodities markets, West Texas Intermediate crude oil is US$50.66 per barrel. Brent crude is US$58.99 per barrel.

Turning to gold, the yellow metal is trading for US$1,291.66 (AU$1,794.22) per troy ounce. Silver is US$15.65 (AU$21.74) per troy ounce.

One bitcoin is worth US$3,656.57

The Aussie dollar is worth 71.99 US cents.

A ‘tiny’ $22 billion market

Having covered off one of the major threats, and some industries to be wary of, let’s look at one of the biggest investment opportunities in 2019.

And that’s the booming legal cannabis market.

Yes, this story got a lot of airplay last year. Yes, all the hype led to some overexuberance. And yes, pot stocks weren’t immune to the wider stock market pullback in October.

But as Bloomberg noted on Sunday, this trend has now strongly reversed:

Pot stocks marked their third consecutive week of gains last week, the longest such winning streak since August, riding high on the broader market’s upbeat mood…

Tilray Inc. shares jumped Friday after Bloomberg reported that the company’s post-IPO lockup period expires on Jan. 15, giving top shareholder Privateer Holdings Inc. its first opportunity to sell. An hour after the story was published, Privateer put out a statement saying it won’t divest any of the 75 million shares it owns in the first half of 2019, sending the stock up 19 percent.’

Canada continues to pave the way in the legal recreational and medicinal marijuana markets. And as you can see below, the Canadian market currently represents roughly half the world’s legal weed market:

chart image

Source: Deloitte
Click to enlarge

A $22.6 billion market is hardly chickenfeed. Yet the global potential for legal cannabis is far higher. Also from Bloomberg:

‘[I]nvestor attention is clearly shifting away from the relatively tiny Canadian market. At the AltaCorp Capital cannabis conference in Toronto last week, Canada was very much overshadowed by chatter about international opportunities. Every company present emphasized their growth potential outside Canada…’

Some analysts estimate the legal global cannabis market could top US$200 billion a year longer term.

I don’t know of any other industry in the world today that represents that kind of potential growth opportunity.

Our own small-cap investing guru Sam Volkering agrees. As you likely know, Sam’s been atop the pot stock story since day one.

You can find details on his favourite ASX-listed pot stock here.

The next three weeks…

Before signing off, a spot of housekeeping.

The next time you’ll hear from me is on Wednesday 6 February.

While I plan to relax during some of that three-week break, much of it will be spent moving my family from Melbourne’s bayside suburbs to a small town in the Adelaide hills.

The move has left most of my urban minded friends scratching their heads. But that’s one of the perks of being a newsletter editor. All you need is an internet connection and a quiet place to write.

Starting next month, I look forward to bringing you the best ideas from all of our editors — and a few of my own — from the tranquillity of my new country home.

In the interim you’ll hear from some of our star editors, including Murray Dawes and Matt Hibbard.

Be sure to tune in tomorrow when Murray, editor of Alpha Wave Trader, gives you his take on the recent market turmoil. I think you’ll like his analysis of how the US Fed is caught in a catch-22 situation.

And don’t forget to check out the latest from The Australian Tribune:

‘Former Labor MP to Fight Explosive Population Growth’

Australia recently surpassed 25 million residents.

Back in 1979, Australia’s population stood at a far more sustainable 14.5 million people.

That represents an incredible 72.5% growth in population in only 40 years.

Proposals to limit growth and reduce the immigration intake are sometimes mistakenly — and often purposefully — conflated with racism.

That purposeful misdirection generally…

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

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