Scala Private Wealth Beyond the News: Australia, lucky country.

“Australia is a lucky country run mainly by second rate people who share its luck. ... Rather, Australia's economic prosperity was largely derived from its rich natural resources and immigration”. Horne observed that Australia "showed less enterprise than almost any other prosperous industrial society." Donald Horne, Penguin Books.

Australia is coming out of the pandemic in much better condition than other nations – due to the natural borders. Not by our political class.

Australia’s strength has been supported (again) by the unrelenting Chinese demand and the strong consumer demand boosted by the various stimulus. This impulse was so strong that conditions are starting to tighten (CBA increased their long-term fix mortgage rate!) to an extent that the Reserve Bank of Australia issued a White Paper that practically says that they will continue yield control and QE to prevent excessive tightening.

There are various issues – while the conditions have improved, but just for the people that “have” – not the “have not” part of the Australian society. Now with Job Keeper/ Job Seeker ending more than 150,000 Australian jobs are at risk.

Our Government took it very easy with the vaccine – but we need to move fast as immigration (a large part of our GDP growth is linked to immigration – both for work and study) has collapsed and a reopening of other countries could leave behind Australia.

Until vaccinations cover a vast part of the population, we cannot open to overseas travel. Moreover, business cannot continue in this open/close way. Vaccinations are lagging - to reach 80% population having one shot by October we need 200,000 vaccinations per day, and we are approximately at number 70 in the vaccination world race –just behind countries such as Rwanda, Lebanon, Peru, Bolivia and Albania!

It does show how Australia is in dire need of reform to stay competitive in this century – both at industrial level (excessive red tape/nanny state behaviour) and at federal level – excessive state powers.

And even the nanny state is ineffective where it is needed. After the Royal Commission and Austrac discovered the bad apples in the banks – Crown is the latest of the Australian “good citizen” companies to fall. The fact that our Parliament is riddled with sex predators is shameful beyond words. While China still needs iron ore at least until 2025 (China is building quality mines in PNG and Africa), the political situation with China is deteriorating in a scary way.

Unless Australia wakes up, the luck soon or later runs out.

USA

The situation is still improving, but after the first dramatic fall in Coronavirus rates – the situation has stalled – and probably will remain like this until summer and vaccinations reach 80%. The large Democrat stimulus passed and now Biden is focussed on a large infrastructure stimulus. The political situation is deteriorating as Democrats are taking no consideration of Republican needs. The infrastructure stimulus will be harder to pass as some centre leaning Democrats do not want to use the reconciliation strategy that practically bypasses Senate discussions. This is setting a very acrimonious Mid Term Election in 2022.

The only issue that Democrats and Republican seem to agree on is that China is the new enemy – the Alaska China-USA meeting practically ended in insults.

March Consumer Confidence posted a big beat (estimated 96, actual 109.7), showing that the US is recovering even before the stimulus and infrastructure plan of President Biden that is really excessive and risking to overheat the economy from 2022 (and that is what is provoking the yield to move higher). The infrastructure plan is again very big (circa USD2.5tn in 8 years ) and accompanied with higher taxes. It is slated to be presented in July, but already it has been criticized by Republicans, Left Democrats and Center Democrats. Definitely a different battle from the huge COVID-19 stimulus. 

European Union

The virus is still ravaging Europe and it shows how the European Union is an inept political entity. Even the Astra Zeneca (UK vaccine) issue looked a lot more political than real. If you look at data and statistics – the probability of getting killed from the vaccine is massively lower than being hit by a lightning.

Modelling on vaccination rates shows that in the best-case scenario in Europe the situation will improve between July 2020 and March 2022. A 6-month delay recovery in comparison to US and China. This is backed by much less stimulus – so Europe will be lagging in the recovery – aside a few exporter companies.

Inflation would be a disaster for Europe – as there is little recovery and huge debt a clear path to stagflation (stagnation with inflation). The worst case possible. As you well know it is years that I see that this form of EU is not workable.

United Kingdom

The UK is fairing much better than the EU on the vaccine front with one of the best programs in the world.

Statistics are confounding the economists – while a lot of economists where spelling disaster after Brexit (well not me), the data coming in are much better than anticipated

Russia

Russia is trying to use the European virus failure as a diplomatic tool now that their anti-virus Sputnik V has been endorsed by The Lancet – the highest US medical publication.

There is a build-up of Russian troops on the east of the frozen conflict in Ukraine (yes still there). It is a typical warning against President Biden. President Biden immediately went back to the Obama style anti-Russian stance (Russia-Germany Nord Strom pipeline opposition, US business in Ukraine, US sanctions due to the Navalny case).

Middle East

Saudi Arabia is trying to disentangle itself from its own Vietnam in Yemen – but they will need to probably make more concessions – and at the end they will exit US-style – by running.

The Houthi, backed by Iran, has shown the world again, like the Vietcong, that a skilled enemy (as the Vietcong at the time, Houthis have decades of warfare experience) can make an extremely powerful enemy backed by US, UK, China bleed and run.

Iran/US situation is blocked until June 2021 (Iranian election) and China is trying to entrench itself in Iran before that date.

Israel, with the best vaccination rates, is looking yet again to another election (Fifth! World Record!) to try and break the impasse.

Something weird is happening in Jordan. There has been a purge at the highest level. Jordan has suffered a lot from Covid-19 and it is an important Middle East chess piece as it is where interests from Saudi Arabia, Israel, Iraq, USA, Egypt, Islamic State (both pro and against) and Iran usually meet.

China

China is becoming more and more aggressive and insular. The annexation of Hong Kong is almost complete – only “Chinese patriots” can be elected. It is building several military infrastructures in Himalayas (a strategy like the Pacific military islands) against China. The treatment of the Uighur minority is a constant source of attrition with the West.

On the economic front, China clamped down strongly against the Chinese tech company that now are being forcibly integrated and less independent. The economy in general apparently is strong, but again it reverted to spending in order to sustain growth. I fail to count the number, but it is since 2008 that China is trying to make the economy self-sustaining and constantly failing. It is not a pattern sustainable indefinitely.

While the idea that the Covid-19 virus escaped from a China lab has been constantly silenced, it keeps on resurging – even the World Health Organization (a body under the Chinese influence) admits that cannot be excluded. As my readers know, I saw data that confirms that something strange happened in Wuhan in October 2019 as Israeli satellites picked up that the Wuhan biolab went dark (no mobile phone traces) for 2 weeks and at the same time Wuhan hospital traffic (parked cars at the hospitals) more than tripled. Moreover, lately became public news that US scientists that visited the facility in 2018 flagged to attention that they were worried about the security of the facility itself.                                                                                                                       

Myanmar

Quite a few sources are showing that the Myanmar coup has been sponsored by China. While it is not confirmed there are some tell tales. While Myanmar is effectively cut out from the world, every night unregistered planes, on average 5, have flown from Yangon and Kunming in China (font- The Strategist and pictures from Twitter) probably transporting military personnel and most likely cyber instruments to block the web access. Myanmar is very important to China as 50% of the rare earths’ minerals come from Myanmar.

This is not in the news much in the media. I feel like it is a form of censorship to limit further deterioration of the situation with China. As Hong Kong looks similar to the German assimilation of Austria in 1938– Myanmar looks like Czechoslovakia takeover in 1939. Between now and 2030, Taiwan will be a Poland or Cuba moment, unfortunately.

Australia

Australia’s economy is improving even if the end of Job Keeper will probably create a bump. The biggest issue is property. Both RBA and APRA said that it is not their duty to keep property in check and the States are starving of taxes. In Australia, 90% of investments are mining and property with extremely little investment in business and productivity. The potential of inflation and rising yields should terrorize much more the real estate market than the stock market.

Market 1.4.2021

In March, the eternal Bears that see a crash any time there is a bump, really came out in force. The market followed almost to the letter my March newsletter (market will reach 3,700-3,750 – it had an intraday low 3,768) as the T Bond 10-year yields went up to 1.77%. From there it recovered and practically went sideways since March – and very slightly positive since December – circa 4%.

April traditionally is a positive month and this year it should respect the tradition (in the last 10 years April was the best month in the year).  With an average of +2% for the SP500 which would bring the SP500 over 4,000 points and more likely towards the top of the year (average target 4,200-4,400). Then in late May inflation will poke its ugly head again as the data from March will start appearing and the year on year inflation will be scary as May 2020 was the Covid-19 peak.

At Scala Private, the decision not to time the February/March correction proved wise. We added some positions, but more conservative, diversifying non-tech position and adding alternative strategies as I would expect this year to be more volatile as inflation will keep going on and off. 2021 asset allocation is a mix of barbell approach (technology for secular growth and financial/economy reopening thematic) with a good dose of alternatives to stabilize the portfolios.

Inflation

The media will spruik a lot the scare of inflation this year. The reality is that inflation is already here, and anyone can see it (look just at the prices around you). The Government declared inflation will not go anywhere as the government cannot let inflation appear – so, for the market, apart moments of fear will not exist as it never existed in Japan even with debt ballooning.

The Government inflation basket is just a trick – I would not go in discussions here (too long) – but just think that the inflation basket is practically the same of the 1980s and does not include all our multiple mobile phones spend, NBN networks and in general tech spend, Netflix, Foxtel etc. So, it is a fake basket, it mainly includes 1990s expenditures. Why they do this? With the level of debt, Government is even more scared about inflation than the market.

Cryptocurrencies

Crypto are all the rage and this time are here to stay and becoming a new asset class. Personally I consider them more like commodities than currency – one of the basic tenants of currencies is storage of value – and crypto movements are too wild for that.

At Scala Private, usually we prefer exposure via crypto proxy such as PayPal and Square to decrease volatility.

Financial Advisers

Financial advisers are under pressure. The new education standards (FASEA ethical exam by January 2021 and accepted university standard by 2026) and compliance regulation are making advice so expensive that clients under $1,000,000 are becoming non-serviceable. Costs have increased also as the banks, after all the damage done, exited en masse the industry. So much so that the ASIC advisers levy increased by 60% in a year where other businesses had received Covid-19 subsidies.

The Australian adviser population already decreased from circa 25,000 to 21,000 with very few new entrants – circa 300. Forecasts look at a 13,000 by 2023. Meanwhile the rules about intra fund advice for industry funds have relaxed.

By 2026 there will be advisers for the wealthy and what will be called (falsely) independent advice providers from industry super fund for the rest of the population. Practically a substitution of the role from the bank advisers to industry fund advisers. As banks and Crown shown, that will last until there will be a Royal Commission on Industry Fund – the most opaque and powerful industry ever allowed in Australia. But do not worry – industry funds are really “the untouchables”.

A new wolf of Wall Street – greedy banks

The last week of March the financial world has been rocked by another fallen wolf of Wall Street – Bill Hwang. Bill Hwang was always a dodgy character – in 2012 his hedge fund Tiger Asia management was found guilty of insider trading. It was blacklisted, but a few years after reappeared with a new hedge fund Archegos Capital. Archegos Capital got involved in trading high stake CFD (contract for difference gaining huge, levered exposure). In the last week of March things went badly wrong and the fund had to liquidate positions worth in excess of USD20 billion dollars especially on Asian tech. Credit Suisse and Nomura had to warn investors and regulators of huge losses (as they were margin counterpart) and other banks like Goldman Sachs got also involved.

Hwang was a compelling client for the banks that made huge brokerage fees. The losses for Nomura are estimated in USD2bn and Credit Suisse USD3bn. Less than 10 banks lent in excess of USD50 billion exposure to this little-known hedge fund without knowing each other’s positions. The banks are so much better capitalised than 2008, but it makes you wonder how the regulator again failed to supervise.

Wonder no more – while it is quite easy to hunt the small financial adviser that has no money to defend himself, going after big banks with lobbyists and swathes of lawyers is so much harder. This is putting some pressure on some of the best securities – but it is temporary – the stock liquidation has to finish before Easter.                                                                                                            

A Joke

My husband purchased a world map and then gave me a dart and said, “Throw this and wherever it lands—that’s where I’m taking you when this pandemic ends.” Turns out, we’re spending two weeks behind the fridge.

Information contained in this newsletter is general advice only. It does not take into consideration your personal financial situation, goals or needs. You must consider the appropriateness of the advice prior to acting on this information. Please seek advice from us or your financial adviser and read the Product Disclosure Statement/Financial Services Guide of the product you are considering prior to investing in that product.