Never invest in any idea you can’t draw with a crayon

Never invest in any idea you can’t draw with a crayon
  • Information overload
  • Let’s get complicated
  • The Aussie investor’s crystal ball

Confession time.

I completely borrowed that headline from the internet.

No idea who said it. Don’t care, really.

But I will tell you this. It’s brilliant advice.

Because today I am on a mission.

To show you how simply things work when it comes to analysing the health of the Aussie economy.

What if I told you there was a way to predict our fortunes, without reading a single statistical report?

That you could shelve all the official Australian Bureau of statistics reports, and ignore central bank statements?

Sure, they have their place.

But finding the time to scour through them, and then come up with your own interpretation of what’s going on in the Aussie economy, is time-consuming.

What if I could hand you a little-known market crystal ball?

One so few investors use…

…one that could even put you ahead of the investing curve?

Information overload

Before I show you this simple trick to market analysis, let’s go through some hard data.

We’ve had a week of economic ‘news’.

First there was the final report from the Royal Banking Commission on Monday. I’ve already covered my thoughts on it here and here.

Then, the Reserve Bank of Australia held its first meeting for the year on Tuesday. Rates are on hold. The following day, RBA Governor Philip Lowe hinted there would be a rate cut.

Speaking at the National Press Club, he said, ‘Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down.’

He then added that the rate decision hinges on the unemployment rate. That’s baloney. There’s no way the basis for interest rate changes rests on one single bit of data. I’ll cover this in more detail next week.

However, in between the cash rate not changing and Lowe hinting that it will, there was more news.

December retail sales were woeful. Retail trade was negative, down 0.4% for the month.

December is meant to be the busiest time of year for retailers. Yet it turns out we did most of our shopping in November (when retail trade rose by 0.5%). 

Not only that, CommBank saw retail-related credit card spending fall sharply over the November to January period.

But who cares about retail data, right? That stuff is just for people who like shopping too much…

Before I answer that question, let’s look at the ‘important’ economic data.

Let’s get complicated

Before the RBA told us on Tuesday what we already knew, there was a trade balance data dump.

That is, Australia’s trade balance was released.

And it wasn’t good news.

Trade surplus — where the value of our exports is higher than the cost of imports — grew to $3.68 billion in December, up from a $2.25 billion trade surplus in November.

It might not sound like much, but it’s a 65% increase in 30 days.

On the surface, a surplus sounds good, doesn’t it?

After all, we have been to conditioned to think that a ‘surplus’ means we have spent less then we earnt. It’s a favourite trick of the pollies each election year…reminding us they’ll bring Australia back into a ‘surplus’.

In spite of the positive-sounding headline, a trade surplus isn’t always positive. 

More so when you’re not a country that manufactures things for export.

Exporting more than we import tells us that domestic demand is weak.

Let me put that another way.

People and businesses aren’t buying as much. That means there’s less demand for things we normally would bring into the country.

Retail goods like apparel, electronics, coffee and furniture imports would all be lower.

And it isn’t confined to households, either.

Because a higher trade surplus also reflects the lack of business demand for goods used in construction and engineering.

Trade surplus data paints a big picture of the economy.

In addition, the November to December jump isn’t a one-off.

We have been growing a trade surplus since January 2018.

The monthly net gain steadily increased from $1 billion at the start of last year to $3.68 billion at the end of the year…leaving Australia an annual increase of $22.2 billion.

Which, by the way, is more than double the $9.5 billion trade surplus for all of 2017.

This is a telling sign for the overall health of the economy.

Local demand for stuff — whether it be for business, to fill our homes, or to spend at cafés and restaurants — is dropping.

We are bringing less and less into the country.

Our consumption-driven society is spending less money.

Whew. Thank goodness we have that complicated data set to tell us that.

The Aussie investor’s crystal ball

Now, allow me to let you in on a secret.

As an investor, you don’t need to go through complex trade surplus reports…or even wait for the retail trade data to tell you retail sales dropped.

Australia is a consumerist society. Our gross domestic product (GDP) growth depends on people spending money within the economy. Not iron ore. Not gold. Not natural gas.

The junk you buy at the shops and the services you pay for — so you don’t have to do the job yourself — are the lifeblood of Australia’s growth.

You can actually analyse the health of the Aussie economy yourself, with ease.

The idea is simple.

Track the performance of retail companies.

For example, financial data for retailers like Kmart, Target and Bunnings — which all belong to the Wesfarmers [ASX:WES] family — as well as Myer [ASX:MYR], JB Hi-Fi [ASX:JBH] and Harvey Norman [ASX:HVN] are all excellent indicators of how Aussies are spending their money. 

Watching simple profit increases or decreases indicates which way Aussies are leaning — before months-old GDP, trade surplus, construction or production data comes out.

The most basic information of all can give you, as an investor, an edge as to how the overall country is going.

Just because something is easy to understand doesn’t mean it should be dismissed.

That’s why I believe all Aussie investors should have a good understanding of Australia’s retail environment. 

In fact, a little over two weeks ago, I showed you my market crystal ball to gauge where the Aussie economy is at.

In other words, using the retail market to understand consumer behaviour. As I said, knowing this is crucial to give investors an edge in today’s market.

And you know what I got after I produced that article?

A sit-down with my publisher.

He explained to me that no one cares about retail. I should stick to topics like gold, central banks and broader macro analysis. Big-picture ideas.

My counter argument was that I’m here to demystify the markets.

To show you that a deep knowledge of the markets doesn’t require complicated analysis.

That sometimes, the simple things provide the most accurate answers.

To teach you, as an investor, how to navigate all volumes of information and show you how to take away bite-sized chunks.

To point out where to look first before ‘official’ data leads other investors that way.

To give you an edge in a market crowded out by puffed-up, mainstream analysts and robo trading.

Let’s get down to the nitty-gritty here.

They were his thoughts.

But what about yours?

What can I fill your inbox with each day?

Write to me at letters@dailyreckoning.com.au, with ‘I WANT TO KNOW’ in the subject line, and tell me what you want to read about each morning.

I look forward to hearing from you.

Best Wishes,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

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