The Pain Report will provide you with a weekly independent and objective commentary on the global economy, in an attempt to help you identify the key forces which will shape the world in the years ahead. For example, I believe that the most significant and defining economic phenomenon of our time is the rise of the Asian middle classes. I urge you to beware the prism through which you view the world, and to be aware that much of the western media’s negative and sensationalist coverage is biased against the so-called emerging nations. In my view, the decades ahead will see an era of prosperity, enlightenment and opportunity that very few today are predicting. If any of the above resonates with you then please read "The Pain Report".
Lots to talk about, but then again there always is. But before we talk about Trump, the ECB, NPC and various bits of economic data, I thought the following might interest you. According to Bloomberg the S&P 500 is currently experiencing the highest volatility in 78 Years. The S&P 500 has moved at least 1%, in either direction, in 56% of the trading sessions so far this year, making it the most volatile start to a year since the Great Depression year of 1938. I’ll leave you to ponder that one on your own.
Let’s get Trump out of the way.
I am sure you will have seen the scenes of violence at Trump rallies over the weekend. Many political pundits suggest this is a direct consequence of the divisive and inflammatory rhetoric that has defined Trump’s candidacy to date. I would agree. When you get people all wound up with hate and fear you usually get violence. But wait a minute, hasn’t this been the Republican narrative since Obama became president? All Trump is doing is tapping into the deep well of discontent that has been fuelled by news media.
Let’s take a quick look:
Obama was not born in America.
Obama is a traitor.
Obama is a Muslim.
Obama is a communist.
America is in recession.
Obama caused the Great Crash of 2008...even though he was elected in November 2008 and became president in 20 January 2009.
Is Trump a problem...you bet he is. And just imagine how Malcolm Turnbull would feel if President Trump made ‘that’ phone call to ask Australia to join them in a war in the South China Sea? Ridiculous you say! It’s getting less ridiculous by the day! Trump will not be president. But the very fact that he will be the Republican Party nominee, speaks volumes for the sorry and sordid state the Republican Party finds itself in. And they only have themselves to blame.
Mario Draghi launches a ‘do whatever it takes’ explosive package of new measures. The most powerful of them all being the ‘targeted longer-term refinancing operations’...now that’s a mouthful and probably not best mentioned at your next BBQ. To encourage European banks to lend, the ECB will provide them with liquidity at a rate as low as minus 0.4%. Did I hear that right? Yes, the ECB will in effect pay the banks to lend. Is this the most stimulatory measure in central banking history? Yes. Has anyone done anything remotely similar ever before. No
Well, except for the Central Bank of Zimbabwe!
Initially the markets sold off, but by the next day they had digested the ramifications of the TLTRO and global equity markets went back to their winning ways. More on that later. So have central banks regained their omnipotency? In the short term it does in fact appear so. Have they really run out of ammunition this time? I think so, and in fact Draghi hinted at this in his press conference after the ECB announcement. The critical words in this regard being as follows.
“ Does it mean we can go as low as we want without having any consequences on the banking system?"
The answer is no, said Super Mario. Well there you have it. Draghi has now signalled that the economy, and by default the markets are on their own now. So we better all go back to following the economic numbers and earnings. The central bank show is over. This is a defining moment in our lives. Ok, that’s a bit of an exaggeration but you know what I mean.
Talking of the numbers, time to take a look at the epicentre of the ‘Things Fall Apart’ story I told you on 13 December 2015. What was the primary cause of the crash in equity markets? Yes, China, and aided and abetted by plunging oil prices...surely that should be good for the global economy? That’s too confusing, let’s move on. It started in July in 2015 with the crash in the Shanghai Composite, then got worse with the botched 11 August RMB devaluation. In recent months the PBOC has launched a herculean RMB rescue mission and the earth is scorched with the remains of those who dared to speculate against the mighty PBOC. Is this sustainable? Absolutely not, but, it is what it is, and the Chinese government have won the first battle in what will be a long war. Furthermore, it is worth mentioning the government has announced that the Chinese economy will grow at an average annual rate of 6.5% from this year to 2020.
We have to turn to Alice for guidance here.
Was it the Queen who said to Alice, “Why I think of six impossible things before breakfast each day?” My view: the Chinese economy will not grow at a rate of 6.5% over the next 5 years. My best guess is that a rate nearer 5% is more likely and I reserve the right to lower this ‘guidance’. But for now the Chinese have tamed the market beast and everything I heard from the National People’s Congress is that the government will play a more ‘decisive’ role in the economy moving forward. I hope the irony of the use of the word ‘decisive’ is not lost on you. If it is then you have not been paying attention over the last 3 years! In other China news, we saw the release this weekend of a batch of weaker than expected Chinese data. Industrial Production in February 5.4% YOY, versus 5.6 % expected and 6.1% in the prior month. Retail sales in February 10.2% YOY, versus 11% expected and 10.7% in the prior month. In a similar vein the ‘aggregate financing’ numbers were much weaker than expected, but there’s lot of noise in this number, but still worth keeping an eye on.
What else have I got for you?
Do you want to talk briefly about that Channel 9 60 Minutes show about the Australian property market. Go on then let’s do that. I didn’t see the show. But it seems nearly everyone in my little village did. The day after the now infamous programme I went to my village. To the bakery, the post office and the newsagent and then to a local farm. This is what happened in the bakery. Hey JP whaddya think of the programme last night. ‘What programme? 60 Minutes! What about it? They’re saying the property market is going to collapse. I then went to the post office. First comment from our delightful post office lady. “Do you think this will happen?” Then the newsagency, then the farm. Same burning topic. So, I eventually watched THE show this week.
Here are my thoughts.
The reaction post-show has been extraordinary. The show itself was not extraordinary. The facts revealed were, well, facts. Household debt, house price levels and the extraordinary capacity of the banks to lend extraordinary amounts of money to very young people in places no one has ever heard of. None of this could be true. Australia has the best lending practises in the world. I imagine the young woman featured who had managed to borrow such a colossal amount wished that were true. It obviously is not or else she wouldn’t have been interviewed and in financial ruin. I’m not saying anymore on this subject today. You know the facts and if you don’t think we are in one of the most dramatic real estate bubbles in history, then I’ve run out of words!!
What I will say is this. Over recent months I have started a more forensic appraisal of the madness we find ourselves in. I am talking directly to real estate people on the front line and what I am hearing is TRULY SHOCKING. But what is MUCH more shocking is the hysterical response from the Chief Economists from our exalted major banks and fund managers. NONE of whom predicted the Great Crash of 2008. NONE of whom said America was experiencing a housing bubble. NONE of whom said America had too much household debt. ALL of whom are still employed as Chief Economists despite having missed the biggest crash in modern history. ONE of whom actually said in February 2008 at a major Sydney investment conference, “ I‘ve got this strong feeling that 2008 is going to be a really good year for global equity markets!” AND you all still listen to EVERY word he says.
But wait it gets worse. Some of those Chief Economists came out in recent weeks ridiculing those dastardly foreigners for having the temerity to come to Australia and to tell us our market is overvalued. You couldn’t make this stuff up. In 2006 and 2007 I did everything I could to scream out loud about the coming crash in America. I’m screaming out loud again, but this time I really, really care because it is my own backyard, and people I care about are going to get hurt. The Australian media has a responsibility to check the track record of those they quote each and every day. Shame on you! And whilst I am angry, and I am, why don’t we mention the scandal at CommInsure, Commonwealth Bank’s insurance arm. What was that about CBA pledging to be the ethical bank? I hope you are following this story. If a story about a company avoiding making payments to sick and dying people does not upset you, I’m not sure what will. Do you still own CBA shares?
Let’s talk markets.
I have been speaking of the trend still being your friend. No need to re-send the charts. The trend is still your friend and its up for now. And I will tell you when I change my mind, which might be at 2 am in the morning!
In closing I spend a long time watching markets, watching economic data and global political events. I enjoy sharing my thoughts with you. I am a self-confessed market and economic data junkie. I enjoy being part of your thought process, whether you be a SMSF investor, a financial adviser, a fund manager, a private investor, or someone who just enjoys thinking about the world. The bottom line is that I hope I can help you make decisions or at least point out things you may not have seen. Or maybe help explain something you have been thinking about. I write without fear and without favour. I want to be able to remain an independent. I want to be able to say beware of Chief Economists who talk nonsense.
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