A Finsec View – Elephants in finance, Meme stocks (again), The Line, Vale Phil & More

12th August 2022

Have we seen the bottom of the market? That’s the question day traders and equity managers worldwide are asking after an unexpectedly robust start to the year’s second half. In the US, the S&P 500 (tracking the market’s biggest stocks) is up around 6.95 per cent over the past month. Locally, the S&P 200 is up around 6.4 per cent over the month. Adding to the good news was last night’s US inflation figures showing headline inflation has fallen by 0.5%.

Of course, there’s still reason to be cautious. Much still depends on how quickly real-world issues such as the global supply chain, the Ukraine War and a re-collaboration of inflation expectations can be resolved.

A sage perspective on such topics is not always easy to come by, so we jumped at the chance when invited to attend Bill Evans’ (Westpac Chief Economist) latest economic update (his first in quite a few months). By way of summary, the below slides are the key takeaways from Tuesday’s event.

We acknowledge this is a high-level summary, so please reach out by clicking here with any questions or requests for context, and we will address them in our next missive.

One theme we found particularly fascinating was Evan’s views on the labour shortage in Australia. A problem predominantly borne of border closures, the below chart depicts just how far below the trend our working-age population is. Even more problematic is that to make up for the 300,000 workers unable to join our workforce in the last two years, the red line would need to cut through the trend line and continue to move at a faster pace for some time to come.

A hard (if not impossible) task considering workers worldwide are in short supply and competition is fierce, Australia’s visa processing is comprehensive, and there may be some resistance from the unions.

Let us not forget that these people will also need somewhere to live – not a straightforward issue considering our current housing shortage.

It certainly illustrates just how vital September’s job summit will be in trying to create short-term solutions – ways in which we can look to optimise the output of our existing workforce.

Perhaps many of our readers would agree that one potential solution is allowing Australians the ability to contribute to the workforce without jeopardising their Centrelink benefits?

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Things that make you go mmm…

Retail stock traders lurking in forums such as WallStreetBets on Reddit are seemingly back to their old tricks of late, pumping up the price of some out-of-favour meme stocks (essentially low-quality companies with big brand names).

Retailer Bed, Bath & Beyond has more than doubled in the past month. GameStop, the video game retailer that became the original meme stock of last year’s rally when it soared 20-fold in a few weeks, has added 25 per cent in the past month. Movie theatre operator AMC, another Reddit favourite, jumped 50 per cent in the past four weeks.

Once again, these stocks aren’t soaring because of their fundamentals; rather, it’s a return to the ‘little guy Vs Wall Street’ narrative – A situation that did not end well for these day traders last time around.

This sort of activity has the potential to make central banks think that there is still too much “froth” in the economy as they try to quell inflation. This may well see them continue to raise rates even as inflation numbers start to show signs of easing – as we saw in the US this week. No one wants to do an Arthur Burns, the Fed Chairman in 1974 who took his foot off the break too soon, resulting in a 20-year battle to ring inflation out of the system.

Mmm…. Feels like household savings from the pandemic are starting to burn a hole in people’s pockets!

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Wealth Wisdom – Elephants in Finance

There is a famous Indian parable that is taught in philosophy classes throughout the world to prevent absolutism and foster tolerance for the views of others. To paraphrase, six blind men are taken to “see” an elephant for the first time. One man feels the elephant’s tusk and declares that the elephant is like a spear; one man feels the elephant’s legs and declares that elephants are like trees; another man feels the trunk and declares the elephant is like a snake. Each man has a wildly different view of what constitutes an elephant, depending on what part of the elephant they happen to come across.

The parable ends as follows:

“And so these men of Indostan

Disputed loud and long,

Each in his own opinion

Exceeding stiff and strong,

Though each was partly in the right,

And all were in the wrong!”

There are few domains with as much noise and chatter as investing. Every day there is a new expert touting their opinion on the property market, yield curve inversion, inflation or whatever the flavour of the month is. Much like the six blind men in the parable, these opinions often have a grain of truth, but their thinking may be incomplete.

So the next time you read that so-and-so is predicting a recession or making a stock pick, remember they may not have seen the whole elephant!

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Cycles

Cycles are part of life, whether it be the cycle of day and night, seasons, tides or weather. And so, cycles are also endemic to economies and investment markets. Some are regular, and some just rhyme. Despite attempts to end or subdue them via economic policy and regulation, the cycle lives on. Usually, when we declare investment cycles dead, they come back to bite us. Sometimes they bring much joy to investors, but they can also bring much angst. But what are they? What causes them? And why do investors need to be aware of them?

A great little article from Shane Oliver, Chief Economist of AMP Capital for Livewire.

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Chart of the Week

Bucking historic trends is the current disconnect between business and consumer confidence in Australia.

Whilst business confidence has lifted and is rising, consumer confidence has all but tanked down 23% from its peak in November last year. The main factors are, of course, rising inflation and interest rates.

According to Westpac Chief Economist Bill Evans, whilst a fall in consumer confidence of this magnitude would normally mean a big change in spending behaviour, today, this is not the case – Household balance sheets are strong (Evans estimates Australians hold $250 billion in excess savings) and jobs are not hard to come by.

Needless to say, strong spending coupled with inflationary expectations (i.e. the expectation that the rising cost of business will be passed on to the consumer) and businesses are feeling pretty good.

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The Line

Saudi Arabia has unveiled designs for its ambitious urban project “The Line,” hyped as a one-building city in the desert which will stretch over 106 miles and aim to house 9 million people.

The promotional material is spectacular: two mirror-encased skyscrapers stretching more than 100 miles across a swathe of the desert. Is it the ultimate in the future of high-density living or a flamboyant science fiction fantasy?

In short, economists, architects, and analysts are not quite sure. So elaborate is Saudi Arabia’s plan to create an urban utopia that even those working on the project do not yet know if its scale and scope can ever be realised.

Recently we were given more insight into the extraordinary ambition of the development when the kingdom’s crown prince, Mohammed bin Salman, outlined central aspects of what he intends to be one of the most ambitious urban developments in modern times.

Understandable humanitarian considerations aside, this project is phenomenally ambitious and worthy of your viewing.

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Vale Phil

We were very sad to hear of IBIS World founder Phil Ruthven’s passing in late July. Phil has been a wonderful (indirect) contributor to this publication – his articles are always highly anticipated, and we have taken great pleasure in sharing many of his missives over the years. One of the great and indeed significant personalities of business in Australia through the last quarter of the 20th century, he was considered by many our most influential ‘futurologist’. Vale Phil.

Below is a eulogy from the IBISWorld website.

A forecaster, entrepreneur and storyteller, Phil was born and raised in Sydney, with Melbourne being home since the late 1960s, Phil spent over 10 years in the food industry, including executive positions in research, production and marketing for Edgells and Petersville, before establishing IBIS Corporate Services as a consulting firm in 1971.

A long-time contributor to TV, radio, newspapers and business magazines, Phil was sought-after for his views on topics ranging from business and strategy, through to economic and social issues. He didn’t mind being called a “Futurist” either, he had a great knack for seeing what was ahead over the next 20-years or more.

Phil undertook a variety of roles in addition to his day job, such as Adjunct Professor at The University of Technology (Sydney), and a member of the ANU College of Business & Economics Advisory Board. He was a past board member of the Melbourne Institute, CEDA and a past Director of Open Family Australia. Homelessness and education were Phil’s focus in his philanthropic pursuits, with his decades of dedication in doing his bit to make Australia a better place for the underprivileged.

In 2014, Phil became a Member of the Order of Australia, in recognition of his significant service to business and the community, in Phil’s self-effacing style, he said “I’m certainly humbled and proud to accept this but holy cow, my mother did 10 times as much as I did for the community and never received one – Mum, this is for you”.

The move from consulting to the delivery of online intelligence direct to desktops was a huge shift for IBISWorld, as was embarking on the information-hungry US economy. Phil had the joy of watching IBISWorld establish a reputation as an essential industry and company intelligence provider for businesses of almost any size.

Although Phil remained on the board of IBISWorld until his passing he stood down as chairman in 2015. He passed executive control of the business to his children in 2001. He spent the next 20 years of his retirement educating Australia’s business community on the keys to business success- probably his biggest passion in life.

Phil’s vision was for IBISWorld to be the world leader in business information. It brought him great satisfaction and pride that this vision was successfully executed in various iterations over the last 20 years.

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Stay safe and look after one another. As always, if you have any concerns or questions at any time, please reach out to your FinSec adviser.