Your editor returns to his Daily Reckoning post finding that nothing and everything has changed in the markets. Our last day in the office was Friday, June 14th. The S&P ASX/200 closed at 4791 on that day. As we fire up our lazy neurons today, the market is trading at 4810, down on the day but up over the last three weeks.
The first takeaway from this is that everyone should take more holidays. It gives your brain a genuine chance to rest. You wipe out all the noise that passes for useful information. You abandon the conceit that every bit of news affects the intrinsic value of every security all the time. You breathe deeply.
And then you get back to your desk and find that things aren’t that much different. Or are they? On the surface, there are some obvious changes. Australia has a new Prime Minister. But he’s not really new. Kevin Rudd returns to the job taken from him. But like all politicians, he’s essentially the same, a dangerous sociopath eager for your approval and tax dollars.
The markets, however, are trickier. Bond yields are rising. The first cause of this rise in yields appears to be good jobs data out of America. The June data in the US showed headline growth of almost 200,000 jobs. That beat expectations. And then came the ramifications.
The better-than-expected jobs data (taken at face value) set off a chain of reactions. If the job market recovers, the Federal Reserve can stop buying $85 billion a month in US Treasury bonds. If the Fed stops buying bonds, bond prices will fall and US bond yields will rise. If US bond yields rise, the US dollar will be relatively more attractive than, say, the Australian dollar. For Australians, better means worse.
Speaking of worse, analysts are now queuing up to outdo each other with their ‘downside’ forecasts. Keep in mind these are mostly the same people who called the Australian dollar a new global ‘reserve currency’ last year when it reached new strengths against the US greenback. How fickle.
The falling local currency has company, as you can see from the chart above. The spot copper price started the year off with a bit of a surge. But since then, it’s been down. The big question for stock market investors right now is whether the May/June correction was the end of an adjustment or just the beginning. From what our colleague Greg Canavan has said, it’s just the beginning.
In one way or another, it all comes back to real estate and land values. For example, the listed property sector has lost nearly $10 billion in value since May 21st, according to an article in today’s Australian. Foreign investors parked money in Australian real estate investment trusts (REITs) as an easy way to cash in on high yields and a strong currency. With lower yields and a weaker currency, the foreign money is headed for the exits.
The further the currency falls, the faster the exodus. Judging by the carnage in the resource stocks, most of this is priced into the mining stocks already. That makes the mining stocks a contrarian delight right now, if you’re willing to bear more losses and wait a while for a rebound. How the rest of the market reacts is the remaining question.
But let’s leave the reacting to rats in a psychology experiment. For today, we’ll stick with objective truths. One objective truth is that Australia is absurdly expensive and America is cheap. Over three weeks in the US in which we travelled to Oregon, Maryland, Washington DC, New York City and Colorado (with brief transits in San Francisco and Chicago) we were gobsmacked at the cost of living in the US. It’s low.
Take the char grilled lamb burger served at The Breslin on West 29th street in mid-town Manhattan. Your editor went there for dinner on the advice of a friend and was not disappointed. Served with cumin mayo and sweet potato fries and topped with red onions and feta cheese, the lamb burger is not cheap at $21. But when you figure that even craft beers in New York City are half as expensive as Australian beer, the meal comes at a bargain price with excellent ambience.
Outside New York, Chicago, and San Francisco, the bargains multiply like bunnies in spring time. Breakfast for a party of six at an International House of Pancakes set your editor back $66 before a tip. During a particular hot day at the West end of the Pearl Street Mall in Boulder, we took the time to have a few beers with our brother looking over the Mall and the mountains. Four beers a piece all up was a cool $44. That is not a misprint.
And the clothes! Oh the clothes! We came dressed for winter and found ourselves in the middle of a heat wave. Luckily, we walked out of a local retailer with a pair of jeans, shorts, a plaid shirt, and two belts for…wait for it….$97. The bargains were immense.
Of course you usually get what you pay for. And in no way is this meant to disparage the quality of life in Australia. But they are two sides of the same coin, are they not? You have quality of life and you have cost of living. Having a high quality of life and low cost of living at the same time is the magic medium we all look for. America has a low cost of living. But the quality of life is variable with the geography.
Australia, by comparison — and Melbourne specifically — has a high quality of life. But the cost of living is brutal. It’s something you only really realise when you travel and find that bottled water is not usually $4.50 and that only in Paris and London will you pay around $10 for a pint. Even allowing for weaker American beer, we’ll take the US on this score.
More importantly for investors, America’s currency is putting a hurt on emerging market currencies. That’s leading global investors to cash in their ‘growth’ chips. If you looked at only that way, you’d say it’s going to be a bitter winter for Australian stock investors.
But the flip side is that if America is truly growing again, you’d expect that to be bullish for the planet. America’s growth engine would drag global stocks slowly higher. All would be as it once was. Tomorrow, we’ll have a closer look at the strength of America’s rally, which is based in no small part on energy.
For today, we highly recommend the lamb burger at the Breslin. To be honest, it didn’t sound so flash at first. But the red onion really makes it. You get a nice crunch and tangy flavour to go with the inherent juiciness of the lamb. The thick slice of feta soaks up some of the grease from the burger and gives the whole sandwich — served on whole grain bun — a rich and creamy flavour. The sweet potato fries — even though they’ve become a bit cliché — do not disappoint.
for The Daily Reckoning Australia
From the Archives…
Central Bankers in Driving Seat
5-07-13 – Greg Canavan
China’s Economic Rebalancing and the Impact on the Australian Economy
4-07-13 – Greg Canavan
Gold Market Rhyming
3-07-13 – Greg Canavan
How Low Can the Gold Price Go?
2-07-13 – Bill Bonner
No Real Economic Recovery Without “Hitting Bottom” First…
1-07-13 – Bill Bonner