Iron Ore, China, Australia and the U.S.

What if the U.S. requests (instructs) Australian companies to not sell Iron Ore to China anymore?

After all, it’s being done amongst the semiconductor industry.

Does Australia comply in line with its signed security pacts?

The price of 62% Iron Ore (as traded in Singapore) closed at $81.00.

I’ll look for $76.00 price early next week.

This latent weakness correlates well with the leading weakness seen in the AUD/USD.

And Iron Ore related equities are dancing in tune as well.

The risk (or opportunity) lies in the answer to the question posed at the beginning of this note.

October 28, 2022

by Rob Zdravevski

Banks not only feed the piggies but they slaughter them too

I keep reiterating that what is more important about where interest rates have traded up to isn’t about the nominal rate, but rather the quantum or factor which the nominal rate have risen by.

Yes, the numbers look bigger when rates are rising from 0.5%…..but people, households, companies, governments etc etc don’t necessarily temper their borrowing when rates are low…..We tend to become accustomed to the ‘going rate’.

In general, the piggies are always at the trough.

When a family is seeking a mortgage of $600,000 but their credit provider announces the good news that they have been approved for $680,000, I suspect that they accept all of the $680,000. After all, they can use it for the landscaping etc etc.

We are happy to continue taking as much we can get or is available.

If my mobile phone plan allows for 20GB of data, I’m sure I’ll use it up and then ask for an upgrade to 40GB. Soon after, I’ll be requesting for an upgrade to 60GB of data.

When the Australian cash rates were 0.25% in last 2020, I was asked if I thought the Reserve Bank of Australia would cut rates at the next meeting.

My response was, “who cares”. The questioners were often shocked by my seeming flippancy.

At this point, I would add by asking, “How much debt do you have and how pressure are you under, that you need a further 15 or 25 basis points of relief”.

Today, if your cost of borrowing has risen from 3% to 6% and you are now speculating whether interest rates go up a further 1% receives the same response from me with the difference being, are you still carrying so much debt that you may ‘break’.

Is it the Fed that is possibly going to ‘break something’ or have we simply kept taking on more debt?

In the graphics below, you can see where the citizens of various nations sit in the indebted stakes.

source: Trading Economics

Look at those frugal and financial responsible Latvians and Hungarians.

Household Debt as % of net disposable income
source: OECD

Let me get back to the illustrating the ‘factor’ of the rise.

When rates went from 6% to 8%, it was only a 33% increase.

When rates went from 8% to 16%, it was ONLY a 50% increase.

Mortgage rates in Australia have nearly doubled. In the U.S., they have easily doubled.

The U.S. 2 years Treasury Bond yield has risen 10 fold.

When your interest repayments or the total cost of capital increase by such a factor, it is the quantum of the rise from the previous levels where you were comfortable with, that hurts the most.

My studies show that government bond yields have never risen by factors of 3 or 4 from their lows within any credit cycle.

At these extremes, as the chart within the below shows, the 2 year bond yield is miles above its 200 week moving average.

Why doesn’t mean reversion matter now, when it has many times prior?

Expecting rates to go higher and challenge gravity, probability and mathematics is a very foolish and crowded trade.

This is not about calling doom and whether the Fed ‘breaks something’……but rather it’s about thinking independently and reading the market tape as it is.

Behind the talk of where rates go to, sits speculative or investing opportunity.

If you have a view….then make the trade and take a position.

Those who shorted bonds when rates were 1% have made a fortune.

Today, if you think rates go up noticeably more……enough to tempt you into a trade, then short bonds and ride the expectation of whether the Fed keeps hiking rates to a point where ’they break something’.

If you think interest rates will fall, you could buy bonds.

Although, this is not a binary choice and the bond market may not be your natural business.

You can express you trade idea in many different manners.

For example, if interest rates keep rising, then you could short the equity of heavily indebted companies or technology stocks which aren’t profitable and have negative free cash flow, or

If you think rates are going to decline, then perhaps owing shares in high growth companies may see their prices ‘catch a bid’.

Of course, this is not personal advice and it’s important to do your research and analysis.

October 12, 2022

by Rob Zdravevski

The cratering in stock indices is afoot.

HSI and HSCEI today are doing so.

Opening gains in stocks are being given up as the past 2 days of trading is occurring.

Pessimism is growing amongst a host sentiment and survey indicators.

Really long term mean reversions are occurring or nearing.

Smaller investors seem jittery.

The AUD/USD is plunging. A visit to 0.6320 would be a 3 standard deviation event.

On September 9th, 2022, I wrote;

“I think prices will jump a little, drag in a few more people and then spit them out again in the coming week or three followed up with another swoon.”

And here we are…..

For a bit of sport, I think S&P 500 has a terrible day during Wednesday’s session and the Aussie market will give up its early gains then sink further on Thursday before traders swoop in and start buying 2 hours before Thursday close not before they dump the same stock into Friday’s close before their long weekend on the Australian east coast.

That’s the sort of market we have currently.

September 28, 2022

by Rob Zdravevski

Australia is not in recession.

As much as I dislike the time spent speculating on such a definition, if I’m forced to pass an opinion, it’s looking like a mid cycle slowdown.

Irrespective, businesses adjust and we trade through the cycle.

Over the past 40 years, studies show that recessions are officially registered somewhere between 18 months and 22 months following the inversion of a country’s yield curve, being when the difference between the 2 year and 10 year bond yield trades into a negative percentage.

The jury is still out whether the 5 year minus 3 month yield is a better indicator to watch.

So back to the traditional 10 year minus 2 year…..and unlike the United States, the Australian yield curve is not inverted.

The red line in the chart below represents 0.00%.

The two things occurring which I think will invert this curve are;

1) an overzealous Reserve Bank of Australia hiking rates too much trying to correct the overly accommodating and subsidising government fiscal policy errors and;

2) a government which cuts off the nations (commodity supply and capacity) ‘nose to spite its own face’ by crimping production and export of gas, coal, iron ore and other minerals.

September 19, 2022

by Rob Zdravevski

Watching Currencies – AUD/JPY

Correlations – AUD/JPY and the Australian Inflation Rate

September 5, 2022
by Rob Zdravevski

Australian Inflation Correlations (Natural Gas prices)

As an addendum to last week’s note about elevated Natural Gas (US$ Henry Hub) prices,

here is a chart pitching those American gas prices against the Australian inflation rate, aiding my call for moderation.

September 3, 2022

by Rob Zdravevski

Knowing how the world works

My inadvertent political comment is pointed towards the recent ‘sudden’ and ‘rushed’ coincidence of Australia’s Prime Minister electing to visit the Glasgow COP26 climate event aligning with the subsequent release of a (albeit feeble) net zero climate policy in order to support his reason to ‘show face’ at the event.

Imagine being a political eunuch showing up to a pro-climate change conference without a pro-climate change position.

The poor soul faces an almighty dilemma.

The consequence of his absence at COP26 (as the leader of a nation which is the 2nd largest per capita carbon emitter) would be palpable.

Although having a firm view on global warming (notice how we don’t call it that anymore) and setting an appropriate policy carries a risk, for it has been the re-election downfall of the past 4 Australian Prime Ministers.

But all is averted……

Furthermore, in the coming week, fully vaccinated Australians can now depart Australia much more freely and return from international travel without the need to quarantine.

What a wonderfully coordinated convenience for the travelling ministerial delegation to Glasgow.

There is nothing illegal here, but it’s just a prompt to be aware of how things are framed and presented.

Happy travels!

Very Good Pay for Low Productivity

A topic I’ve been thinking about involves wages, labour and productivity.

Particularly in Australia.

Bureau of Statistics data suggests that wage inflation is benign.

I am seeing the contrary. A range of people from hospitality workers, truckers to tradies being paid above award rates for their labour.

Sorry folks, but house cleaners are making $55 per hour. That’s the same as a registered nurse.

On the subject of labour, it is anecdotally evident that we have a shortage of labour. Whether that is spliced and framed between those willing and not willing to work (either subsidised or otherwise), available labour is scarce.

I’d like to be corrected with this next statement but productivity (any type that you wish to look at) is significantly lower than it was 20 or 30 years ago.

Certainly software has helped increase one type of productivity but generally in Australia, I think the drop in productivity commenced from the moment Bill Kelty became the Secretary of the ACTU in 1983.

The costs associated with hiring and keeping employees coupled with the difficulty in firing staff has manifested it into a growing gravy train of complacency and lack of productivity.

Now, it has spread into a common work vernacular.

Why does it take 18 months to build 5km of highway ??

Australia is a one-speed economy.

Slow !

September 1, 2021

by Rob Zdravevski

It’s a seller’s market

In the context of the Australian residential real estate market and specifically, the Perth market I was asked by an esteemed national accounting firm today for my buy, sell or hold opinion.

Following the discussion, I followed up with this email,

“In today’s meeting I gave you that current valuation case for residential property being expensive or at least fully valued, in citing a net earnings yield of 2% equating to a Price/Earnings Ratio of 50.

My other negative points included fixed or perhaps growing expenses (including rising interest rates).

Poignantly, should interest rates double, your client may still be able to service the debt, but others around him (especially those buyers of property in the past 2 years) may feel debt payment strain. This leads to a rise in listings and lower prices due to increase stock. Water does find its natural level.

On the other side of the financial statement, residential properties don’t have same ability to increase revenue in the manner or potentially the velocity in which a corporation can.

Invariably, higher residential prices have heralded new dwelling development which also increases stock.

But most subjectively, when you find clamouring buyers driven by scarcity and fuelled with low interest rates, it is identifiably a “Seller’s market” and not the other way around.

It may not be a time to ‘dump’ all holdings as it depends of your cost basis, the utility the property provides or the associated debt and holding costs but there are times to trim and sell assets when they are fully priced.

When it comes to residential real estate, a seller should greet moments when liquidity and buying interest is abound and forgo perfect timing, as the real estate market doesn’t afford you ’natural’ price discovery and quick settlement periods, unlike the stock market.

Catching the ‘fat’ part of the trade is perfect.
Preserving capital is paramount.”

August 24, 2021
by Rob Zdravevski


ASX 200 Registers Rare Monthly Overbought Reading

This month, the ASX 200 has touched a “rare” Monthly (not weekly, but monthly) Overbought reading.

For the lack of a better word, I’m calling it rare as the chart below covers 35 years and this level has only been (generally) visited 5 times prior.

Such a moment is worth noting but it’s not an absolute ‘sell’ signal.

My work suggests a greater probability for higher prices or a ‘melt-up’ before we see a peak.

For now the upward trend remains intact and I’ll look for the index to touch 2.5 standard deviations (the upper end of the bands illustrated) above its mean before searching for exhaustion of the current bull market.

Keep in mind that prices can stay ‘overbought’ longer than expected and the constituents (and their weightings) have changed over the course of this charts history.

August 15, 2021

by Rob Zdravevski

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