Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
Aussie Economy to Benefit With This Rising Market
They call Jeff Gundlach the ‘Bond King’ on Wall Street.
One of his notable forecasts in 2016 was calling the low in US interest rates. He was right on the money; they’ve moved higher ever since.
And now the 10-year bond yield in the US has gone over 3% again.
This is important for your investment strategy.
Inflationary pressure is building in the US economy. The Wall Street Journal reports that US wages grew 2.8% over the last 12 months to July.
Trump’s trade tariffs aren’t helping, either. They’re already pushing up costs for big users of steel and aluminium. And it could get worse.
The Wall Street Journal reports that the US government could raise tariffs to 25% on US$200 million worth of Chinese imports.
Is this posturing to frighten Beijing? Maybe.
A looming threat nullified for now
The rising interest rate on long bonds can’t be ignored. It steepens the so-called ‘yield curve’, which measures the difference between short- and long-term interest rates.
You might have read in recent months how this curve was in danger of ‘inverting’.
That’s when the short-term rate goes higher than the long-term one — an unusual state of affairs, and a fairly reliable indicator of a looming recession.
We’re getting a reprieve on this for the moment.
It’s also better for the US banks because it helps with their net interest margin. What’s more, the cost of credit is rising.
The general dynamic is that we have rising inflation at the same time the US government is borrowing an awful lot of money.
The US Treasury announced on Wednesday that it will borrow an additional US$30 billion over the next three months.
The total yearly US government deficit could hit US$1 trillion a year to 2023.
Presumably, there’s enough money sloshing around the world for this debt to find buyers. And the US government has one thing to be thankful for: the dividend yield on US stocks is now below 2%.
That makes stocks slightly less appealing to income-focused investors relative to US government debt. But rates will have to rise to reflect the risk of inflation now brewing.
The Bond King says he likes mortgage bonds better than US Treasury debt. The reason is simple they pay more.
But take note of the clue embedded in this idea: US real estate is strong. An index of house prices measuring 20 US cities is up 6% for the year.
It’s hard to figure out what to do as an investor when the US economy seems so hot right now and yet we have the dangers of a weakening China.
But there’s a third wildcard at play to consider too: India.
The hottest economy in the world
Japanese vehicle manufacturer Honda’s latest earnings report reveals its largest motorcycle market is India, where sales were up 28% in June.
There’s every suggestion that India is booming. Two good proxies for the health of the economy — auto sales and bank credit — have expanded recently at double-digit rates.
But we don’t even need to look at those. Just look at a chart of the Indian stock market right now.
Stocks are flying. What’s even more surprising is that this is happening as two weaknesses of the Indian economy — high oil prices and a weak currency — put pressure on growth.
The Indian stock market is going up regardless.
I can’t say it’s a country I understand a great deal about. But clearly there’s a lot of wealth creation happening right now or the stock market simply wouldn’t be rising like this.
In fact, the Wall Street Journal reports that earnings for companies in the MSCI India index could rise 28% this year.
This is very good news for Australia. India is already importing our LNG. The more they buy, the better for us.
And take note that the price of LNG is getting a massive boost from the heatwave rolling across the Northern Hemisphere.
It’s so bad in Japan that utility companies have taken to burning dirty fuel oil to meet demand from air conditioning usage.
China, South Korea and Japan are all big buyers of LNG. It’s one reason why I find it hard to be particularly bearish on the Aussie dollar. Australian exports to these nations could soar.
Not many people appeared to notice but the huge Ichthys LNG offshore gas project in Western Australia began producing gas in July.
Shipments from Darwin are set to commence in September. This was originally due to begin in 2016. Nevertheless, at least now the pricing environment looks much better.
I see a big leg up coming in commodities.
The perception right now in the market is that a weakening China will hurt commodity prices.
My take is that rising inflation and a surging India and US make commodities the place to be for the next 18 months at least.