These two indicators spell trouble ahead

Thursday, 14 November 2019
Adelaide, Australia
By Bernd Struben

  • Markets
  • Why these stocks love government’s heavy hand

The failings of Australia’s increasingly centrally planned economy are in stark relief this morning…again.

Today those failures centre on wage growth…or lack thereof…and house prices.

First the wage growth.

As I’ve written here before, wage growth in Australia has largely gone missing since the GFC. That’s despite high immigration rates driving annual population growth of 1.6%. A rate more than double the US’ 0.7% growth figures.

Packing in more people has managed to keep GDP ticking up each year. But per capita GDP has grown much less. And the real (inflation adjusted) take home pay for most Aussies has barely grown at all.

Unfortunately, that scenario is looking ever more entrenched.

Yesterday the Australian Bureau of Statistics (ABS) released its September quarter wage data. The underwhelming results came in lower than the rosier forecast from the Reserve Bank of Australia (RBA).

According to the ABS, the seasonally adjusted Wage Price Index (WPI) rose 0.5% in the September quarter. That drops wage growth down to 2.2% for the first three quarters of 2019.

Once you knock inflation off, real wage growth is languishing at around 0.4%. Not exactly something to write home about.

So what can we expect ahead?

That depends on who you ask.

The Federal government, as you’d expect, is spruiking some optimistic figures. The Treasury is predicting wage growth to lift to 3.25% next year and 3.5% for the 2021–22 financial year.

The RBA looks to have resigned itself to a more realistic outlook. The central bank recently revived its forecasts downwards. It now expects wage growth to remain in the 2.3% range for the next two years. And remember, that’s before accounting for inflation…which the RBA is still attempting to stoke.

Which brings us to house prices…which look primed to rocket once more.

From The Australian:

Sydney and Melbourne house prices could climb as much as 15 per cent over the next year, according to property data analysts SQM Research…

The base scenario – which would keep the cash rate unchanged at current lows of 0.75 per cent, no intervention from banking regulator APRA until at least the end of last year, a recovering economy and a healthy Australian dollar – sees property prices rise 7 per cent to 11 per cent nationally through 2020.

Yet Sydney and Melbourne are expected to exceed this with price growth of 14 per cent and 15 per cent respectively, taking prices significantly beyond their 2017 peaks to new highs.

A 14–15% average annual price rise for properties in Australia’s two largest cities.

Coupled with average wage growth of 2.2%.

Do you see a brewing problem here?

SQM Research managing director Louis Christopher does:

We have some misgivings on the sustainability of this new recovery. Sydney and Melbourne are rising from an overvalued point. Long term, our two largest housing markets look vulnerable and forever reliant on cheap credit. Housing debt, while falling compared to GDP over 2019, is still very high. Better value can definitely [be] found elsewhere such as Perth and Brisbane.’

Christopher really nails it with this line, ‘Our two largest housing markets look vulnerable and forever reliant on cheap credit.’

Indeed.

It’s a vulnerability our wealth preservation expert, Vern Gowdie, has been sounding the alarm on since the early days of the housing bubble.

Vern wrote the book — literally — on the warning signs showing Australia’s housing and stock markets are built on unsustainable foundations.

Now he can’t pinpoint when those foundations will finally collapse. No one can. But his book offers a wealth of actionable advice you can put into play today to protect and even grow your wealth when the bottom does finally drop out of this debt fuelled boom.

You can get all the details here.

Now, to the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 92.10 points, or 0.33%.

The S&P 500 closed up 2.20 points, or 0.07%.

In Europe the Euro Stoxx 50 index closed down 12.70 points, or 0.34%. Meanwhile, the FTSE 100 dropped 0.19% and Germany’s DAX closed down 53.44 points, or 0.40%.

In Asian markets Japan’s Nikkei 225 is down 208.55 points, or 0.89%. China’s CSI 300 is up 0.07%.

In Australia, the S&P/ASX 200 is up 24.94 points, or 0.37%.

West Texas Intermediate crude oil is US$57.41 per barrel. Brent crude is US$62.37 per barrel.

Turning to gold, the yellow metal is trading for US$1,464.17 (AU$2,141.23) per troy ounce. Silver is US$16.97 (AU$24.82) per troy ounce.

One bitcoin is worth US$8,749.52.

The Aussie dollar is worth 68.38 US cents.

Why these stocks love government’s heavy hand

Getting back to cheap money and government intervention in free markets, permit me a moment of heresy.

There are times when both can be good. Very good, in fact. At least for specific stocks.

As discussed above, low interest rates and other government incentives are a boon, at the moment, for property investors in Sydney and Melbourne.

But there’s another small category of stocks that are about to get a major juicing from the Australian and US governments.

Namely rare earths’ miners.

From The Australian Financial Review:

The Morrison government is pulling out all stops to make cheap money available for rare earths and other critical minerals projects as it works with the United States on ways to reduce China’s near stranglehold on supply…

The government will make projects that boost mining and processing of rare earths and other key ingredients in military technology eligible for financial support through Export Finance Australia, including the Defence Export Facility…

Senator Canavan said Australian companies would be able to maximise their access to government support to expedite new on-shore rare earths and critical minerals processing.

“We are determined to develop our rare earths and critical minerals assets for the benefit of Australia and our technology-driven industries,” he said.

If you’re not familiar, rare earths actually comprise 17 different metals.

As noted in the excerpt above, they’re critical for military applications. Think satellites, missiles, jets, and submarines. According to a 2013 US Congressional Research Service report, some 9,000 pounds (4,090 kg) of rare earths go into every SSN-774 Virginia-class submarine.

But it’s far from just military tech. You’ll find rare earths in computers, smartphones, electric vehicles, flat-screen TVs…and most any modern device you can think of.

In fact, last year the US consumed over 18,000 tonnes of rare earths. Yet it produced none at all within its own borders. Zilch.

China, on the other hand, controls over 80% of the global trade in rare earths.

You can see why this is causing no shortage of angst among the US and Aussie governments. And why both government are fast tracking their support of Australia’s rare earths potential.

Next Tuesday, Resources Minister Matt Canavan will co-chair the US–Australia Critical Minerals Dialogue with US Commerce Secretary Wilbur Ross. And it’s hard to imagine either government pulling back on their commitment to turbocharge the Aussie rare earths market.

That in turn should help turbocharge the share price of well-placed rare earths miners.

There’s only one big player in that field at the moment, Lynas Corporation Ltd [ASX:LYC]. Lynas’ share price has dropped from its August highs. But the share price is still up 50.6% year-to-date. And it’s in a good position to benefit from the push for a secure rare earths supply outside of China.

But some of the biggest potential gainers are on the smaller end of the spectrum. Small-cap stocks you’ve likely never heard of before.

Over at Australian Small-Cap Investigator Sam Volkering has identified three such ASX listed rare earths stocks he believes are set to rocket. As he explains:

Having the US government and military involved ensures that this isn’t some sideshow trend. National security issues are not a trifling matter.’

As for why he focussed on smaller companies, Sam says, ‘It means a sizeable order from the US could put some serious heat under the share price of each company.’

You can get the full story in Sam’s report here.

Cheers,
Bernd