‘Dad, Get into Cash’

Wednesday, 20 May 2020
Melbourne, Australia
By Greg Canavan

Back in 2006, John Howard gave the stock market a boost by making it even more tax friendly for superannuation investors. I don’t remember the specifics, but I do remember writing an article about it at the time.

I titled it ‘Supermarket’.

Get it?

The changes put a rocket under the market.

By early 2007, the risk/reward situation started to look decidedly unpleasant. That is, lots of risk, not much reward.

I told my Dad to get his super out of the market and into cash. He told his financial adviser my concerns. His financial adviser, of course, gave the usual spiel. In short, there was nothing to worry about. Time in the market, not timing the market, and all that.

I told Dad he was just talking his book. I explained how we were in a worldwide credit bubble that would not end well. I just didn’t know when it would end.

Dad listened and got his money out. At his age, he didn’t have time to recover from a crash.

I looked like a bit of an idiot for a good 12 months or so.

But the bust finally came, and it was a doozy.

Dad’s lump sum was fully intact.

His mates, on the other hand, were in trouble. They listened to their advisers. As a result, they either had to postpone their retirement or go back to work.

These decisions aren’t theoretical. They have real consequences.

My mate Vern Gowdie knows all about it.

At the same time — in 2006, that is — he was on the other side of the fence. He was a financial planner. But he wasn’t like the other planners. He was telling his clients to get out of the market. Some listened. But many didn’t.

Vern was that confident of what was approaching, he decided to get out. Of his practice, that is. He sold in 2008. Just before everything went pear-shaped.

As you probably know, Vern also saved a lot of people from another bubble earlier this year. He went on record in January saying the Aussie market was set for a 65% decline. We’ve had the first leg of that decline. It hit like a sledgehammer in March. Vern reckons the second leg is still to come.

While Vern is best known for making big (bearish) calls, he’s a financial planner at heart. Just not an ‘institutional’ one.

He recently established The Gowdie Advisory. Up until now, it’s only been available to readers of The Gowdie Letter. But from next Tuesday, it will be available to everyone. There’s only one stipulation. You must be on the priority list in order to learn about and consider the service.

You can do that by signing up here

Don’t worry; it’s free to sign up. And you’ll get a lot of great content by joining the priority list; even if you decide Vern’s VIP planning service isn’t for you.

For example, he recently had a call with our founder Bill Bonner, where they discussed protecting family wealth in these volatile times. A recording of this call is the very first thing you’ll receive on joining the priority list. And there will be plenty more valuable content like that to come…

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In spite of, or because of, China?

The bullish momentum continues. Aussie stocks opened down rather sharply, but by lunchtime had recovered most of their losses. I wouldn’t be surprised to see the market finish the day higher.

With the economy still only very tentatively coming out of government imposed lockdown, and a deteriorating relationship with our largest trade partner, it certainly seems strange that investors are so sanguine.

I mean, yesterday saw some pretty serious rhetoric coming from the Chinese embassy. As The Australian reports:

Australia’s relationship with China is headed towards crisis point amid a fresh war of words with Beijing’s top diplomat in Canberra, and fears of further reprisals from the nation’s biggest trading partner.

As the government prepares to fight new Chinese barley tariffs, Trade Minister Simon Birmingham was forced to respond to a Chinese embassy statement branding Australia’s success in ­securing a global investigation into the coronavirus as “nothing but a joke”.

The market doesn’t seem to care about this escalating risk. Which is the sort of behaviour you’d expect from a liquidity driven rally.

Look, you have to respect the market. Given it discounts the future, the reasons for a market or a stock’s price movements only becomes apparent in hindsight.

For example, I suspect that we’ll find out that the strong performance of many retailers has a lot to do with the fact that government wage subsidies will actually boost discretionary income in the short term.

The concern will be what happens when the subsidies end in September.

The market perhaps isn’t looking that far ahead just yet…

While I’m sceptical of this rally, I wouldn’t be shorting it.

The China issue is a double-edged sword. On the one hard, they are trying to throw their weight around and punish us on the trade front. That’s going to hurt us.

But they’re also helping by opening up the credit spigot again.

Chinese banks created around US$400 billion in new loans in March; followed by above expectations US$240 billion in April. Year-on-year loan growth in April was 13.1%. For an economy that shrank 6.8% in the first quarter, this is startling credit growth.

Not that our iron ore miners are too concerned. The money, in large part, is clearly going into new construction.  

Hellenic Shipping News has the story:

Surging iron ore prices have kick-started the Australian economy’s exit from coronavirus lockdowns amid hopes the Chinese government could further stoke prices by unleashing stimulus spending at its annual congress meeting later this week.

A 13 per cent rally in iron ore prices since April 30 has pushed shares in Andrew Forrest’s Fortescue Metals Group to record highs. The rally appears to have further to run with futures prices more than 5 per cent higher in Monday’s trading session.

Strong Chinese demand for steel has coincided with weak iron ore supply from rival exporter Brazil, where the rapid spread of the coronavirus has added to the ongoing disruption caused by last year’s catastrophic Brumadinho dam collapse. Brazil’s confirmed cases of the virus passed those of Spain and Italy at the weekend, making it the world’s fourth-largest outbreak after the US, Russia and Britain.

As you can see in the chart below, the iron ore price has had a strong run in May. If it can break through the January high (around US$93 a tonne) it would suggest China’s stimulus efforts are having a substantial effect.

If it can’t though, and Brazil’s supply isn’t impacted from COVID beyond a few weeks, then there’s a risk you’ll see prices head back towards US$80 per tonne.

The Insider

Source: Optuma

The next chart shows the ASX 200 Resources Index. China’s credit pump is clearly having a positive effect here too. The sector has put in a very solid rebound from the march lows.

It could still have some way to run. There’s no real resistance until the upper green line, which is about 4% above current levels.

The Insider

Source: Optuma

In short, it appears that the Fed, the RBA, the ECB, and China’s state driven banking sector are all contributing to the reinflation of equity prices both here in Australia and around the world.

The question is, for how long?

It’s a question Woody is going to address on Friday, with Murray Dawes and myself. So make sure you tune in for that…

Cheers,
Greg