You’re smarter than a central banker…

You’re smarter than a central banker…

Today is a tale about expectations versus reality.

The cash cows of yesterday are less abundant, and disappointing investors.

But investors’ expectations are too high.

The Aussie economy is failing around them.

The people know it.

The businesses know it.

You know it.

But for once, investors may be the last to know…

They are desperately chasing growth when there’s none to be found.

Recession hits people first, governments last

It’s been nearly 28 years since Australia’s last recession.

I’ll bet Aussies don’t know what an actual recession even looks like anymore.

I certainly don’t.

When the last Aussie recession happened in 1991, I was 10 years old.

Back then, my days were filled with She-Ra and He-Man battles with the boys across the road.

Kylie Minogue was my hero. My sister and I fought over whose turn it was to play with Barbie’s convertible. I lived for Video Hits on Saturday mornings…

I was kid during the last recession. Not an adult.

The timeline of Australia’s last recession is all blurry to me.

My mum started fulltime work around the time the Gulf War began because ‘things were tight’.

We weren’t alone.

I know many families that went through difficult periods at the time.

One family lost their house when Pyramid Bank collapsed that same year.

Another lost their electrical business.

And our working-class suburban primary school ended up with some posh kids being enrolled after their parents couldn’t afford private school fees anymore.

The point is, these events occurred almost a whole year before the recession was officially declared in June 1991.

Recessions are felt by people long before they are acknowledged by governments.

Will the RBA be honest with us?

Today, we wait with bated breath for the outcome of the Reserve Bank of Australia’s policy meeting.

Don’t worry.

As I explained yesterday, the RBA isn’t going to change rates today.

However, I am curious to see whether the RBA acknowledges what’s going on in the Aussie economy right now.

Car sales, job ads, local manufacturing and payment for services are all down.

That’s on top of falling house prices, dwelling approvals, home loans, and non-government-related construction.

The data is grim.

Once again, the people are feeling it first.

Aussies aren’t spending their money.

According to data from CommSec, retail transactions made with credit cards fell 3.7% from November to January this year.

Yet our credit card balances’ outstanding accruing interest rose 5%; the fastest rate in a decade.

When you put those two data chunks together, you discover Aussies aren’t using their credit cards to shop… They are using them to live…

How will the RBA spin the bad data this time?

The RBA has spent the better part of two years dressing up bad news for an audience.

The thing is, I’m not sure it can keep putting lipstick on a pig.

Is it going to front up and actually point out the dire state of the Aussie economy? Or will it wait until all the data points to a ‘technical’ recession?

When the minutes come out, I will be trawling through them to see just how honest the RBA is with us.

Companies make money — yet investors still punish them

Just how long the RBA plays fast and loose with the truth remains to be seen.

Does the RBA honestly think that if it pretends everything is okay, people will just accept it at face value?

Perhaps we would have a couple of years ago.

But things are different this time.

And it’s starting to appear in investor behaviour.

The earnings seasons for the first half of the financial year is over.

Turns out it wasn’t too bad.

More companies made money than not.

However, the fear from all the earnings is that fewer companies surprised the market to the upside.

In other words, more ASX-listed businesses met what the market thought they would make.

Let me show you what I mean.

Have a look at the chart below.

The blue section shows us the percentage of companies that exceeded market expectations when it comes to financial data.

The green firms met market expectations.

And finally, the red section shows us the businesses that failed to meet what the market expected of them.

ASX firms’ profits relative to market expectations

Source: @ShaneOliverAMP; AMP Capital

Fewer businesses were able to ‘surprise’ the market with strong results.

The reaction to company profits is a good indicator of investor sentiment, as well as a quick snapshot of what’s happening in the broader economy.

We can see that fewer companies were able to deliver good news to investors than in previous years.

That tells us that not only are people spending less…but investors have unrealistic expectations.

We can see that by how a company’s share price is traded after the financial results were delivered.

Take Domino’s Pizza Enterprises Limited [ASX:DMP], for example.

DMP was tipped by analysts to rake in about $661 million in half year revenue.

The pizza chain was one of the few that brought in more money than expected, with a first half result of $702 million.

And how did investors react?

On the day of the news, the share price sold off 6.3% to $43.02.

In the three weeks since then, shares have fallen a further 1.7% to $42.28.

That’s a total tumble of almost 8% for a company that not only was profitable…but exceeded market expectations.

Oh, and DMP’s dividend increased by four cents per share.

Yet the share price was sold off anyway.

What a failing economy looks like

What does this tell us?

Investors are desperate.

We have just one example of a company that turned a profit and increased its dividend.

Minimal growth isn’t enough.

But for investors stuck in a low interest rate, low capital growth world, they want more.

Investors have unrealistic expectations of companies right now. Fewer and fewer businesses are surprising us with good news.

This is what a recession looks like.

This is what the start of a downturn feels like.

Investors don’t need to wait for the Reserve Bank of Australia or our government to declare a ‘technical recession’.

The evidence is growing that gloomy times are ahead.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia