Pete Wargent blogspot


'Must-read, must-follow, one of the best analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Markets & Economics Editor, Sydney Morning Herald.

'I've been investing 40 years & still learn new concepts from Pete; one of the best commentators...and not just a theorist!' - Michael Yardney, Amazon #1 bestseller.

Tuesday 31 March 2020

Scout's honour

Value versus growth

Today we discuss sectors which will be well placed for the decade ahead.

See here for more (or click on the image below):

A few new clusters

COVID-19 update

Another 11,278 Coronavirus tests were carried out in Australia today, taking the total to 244,359.

Aussies have one of the highest testing rates in the world.

Today there were 309 new known cases reported, taking the cumulative total to 4,559.

There have been a couple of new notable clusters, including a spike at Adelaide Airport, with half a dozen baggage handlers reportedly having tested positive.

Airports do seem to be a key risk area, alongside cruise ships, of course, with several new cases today linked to the Ruby Princess. 

So this isn't enough to change the trend just yet.

But still there was no real deterioration again, today with new known cases tracking lower than 8 days ago. 

Stay safe everyone!

China gets back to business (V-shaped recovery)

Credit limps along

A quick look the now largely redundant credit aggregates for February 2020.

Private sector credit growth limped higher to +2.79 per cent for the 12-month period.

There was a considerably better two-month period for business credit growth, with a +0.9 per cent reading for February, following on from a decent result in January. 

The personal credit growth figures are questionable in  terms of what they actually capture these days, but in any case remained massively negative. 

Housing credit growth was flat at +3.17 per cent as the bushfires raged, following a period of recovery.

Investor credit growth was still in negative territory, although homebuyers were very active.

As such there was considerable price momentum heading into March.

So much so, in fact, that CoreLogic will report further price growth for this month, and +9.1 per cent price growth for the capital cities over the year to March 2020.

The housing price growth was led by Sydney (+13 per cent) and Melbourne (+12 per cent) over the year to March 2020, ahead of the shutdown. 

As March has rolled on Australia has headed into a near-lockdown, and property transaction numbers will now sink into a deep freeze.

That said, recent COVID-19 figures have been surprisingly positive, giving hope that we may face only the short, sharp shutdown scenario.

China back in business

Well, well, well...what a turn-up, as China's PMI activity gauge fairly roared back to life in March!

The manufacturing reading of 52 comes after just 35.7 in the preceding month, for a classic V-shaped recovery.

The non-manufacturing gauge was even more startling, ripping from 29.3 to 52.3 in a single month.

The sceptics may say that there's been some gentle 'massaging' of these figures - the most sprightly since 2012 - and perhaps with some justification.

Don't forget, though, that the gauges measures relative expansion rather than absolute output, so compared to the previous month's shutdown the strong expansion is likely justified. 

Regardless of the small print, with a marked improvement in the growth of daily new cases in COVID-19 from Italy to Germany to Spain over recent days, there's a growing sense of optimism that the world can get on top of the situation as China has done.

The figures from New York continue to horrify, however, and serve as a cautionary note. 

Monday 30 March 2020

Value investing through a crisis

Searching for value

Today, we take a look at starting to look around the traps for value in a crisis.

See here for more (or click on the image below):

Morrison unleashes $130 billion in JobKeeper payments

Stimulus to deliver

The Prime Minister just announced the third stimulus package, being an unprecedented $130 billion in JobKeeper payments.

Here are the initially discussed terms:

$1,500 per fortnight is about 70 per cent of the median Aussie wage, and the payments can apply to full time, part time, and casual workers with at least one year in their job, as well as sold traders with no employees.

Last week the JobSeeker payment (formerly Newstart) was also doubled to $1,100 per fortnight.

Businesses with a turnover dropping 30 per cent since March 1 (or 50 per cent for business with a $1 billion plus turnover) will be eligible for the subsidy.

This is tremendous news for workers in the gig economy and other recently stood down workers.

6 million Aussies are expected to be eligible for the payments.

This could result in shorter-term cashflow challenges for some businesses, but it's a huge move, and a very positive one.

Interestingly this could actually result in a payrise for some casual workers, especially many of those in retail and hospitality (where the bulk of stood down workers presumably lie).

And this will make marked difference to the feared huge spike in the unemployment rate, so the Morrison government deserves credit for that, even if the details of the bill do prove to be a little rough around the edges.

Obviously, you can't be classified as unemployed if you're still receiving pay from a business.

Market bounces

Moody's sounded remarkably chilled about the AAA-rating, and markets seemingly liked this news a lot. 

The Aussie 10-year yield moved up a little.

Another positive development today was the lower reporting of new cases of COVID-19.

It looks like things are on track for another materially lower figure today, with a total of 266 new cases.

This is well down from 459 two days earlier, and the lowest daily result since nine days ago on March 21.

Whether this is actually due to positive behavioural changes or it's just an anomaly remains to be seen, but long may these improvements continue. 

State governments are not holding back here, however, continuing to incrementally tighten measures to restrict travel and social gatherings. 

The Aussie ASX 200 fairly ripped into the close - and into during the closing share price auction - on Morrison's announcement to be up by an enormous +7.00 per cent today.

This was the biggest daily increase on record for an ASX, and by a massive 1.22ppts margin (h/t @Scutty):

It's not a surprise that the fastest bear market will see some of the biggest daily rallies, but even so this was a ripsnorter.

Australia needs to build a bridge to the 'other side' of COVID-19, and today was a promising first, ah, pylon.

Kudos to Morrison and Frydenberg for delivering the goods. 

Stormy waters (oil back at a 17-year low)

Oil plunges anew

After a relief rally, the oil price has dropped back towards new cycle lows as the Coronavirus threatens to lead to a prolonged slump in demand.

A few more buying opportunities looking likely this week. 

The price of Brent Crude is now -67.2 per cent below its January highs (h/t @Scutty), and we're staring at the lowest price level in 17 years. 

Some analysts think that the oil price could hit $10/barrel over the coming months, which from my perspective would represent 'back up the truck' territory.

In other interesting twist, Rob Rennie of Westpac reported that this will the strongest month on record for Aussie iron ore exports (as measured in mt), as China gets back to business.

When we come out the other side of COVID-19 the resources sector looks a likely winner.

Stage 3 rolled out

There have been some more promising numbers for New Zealand and Australia on new cases of the virus.

The short, sharp shutdown looks likely to be the base case strategy to flatten the curve and buy valuable time for medical centres and hospitals.

Victoria ramped up its response to Stage Three, with spot fines of up to $1,600 for social distancing breaches, while gatherings of more than two are no longer to be allowed (excluding members of the same household).

Queenslanders now also face $1,300 spot fines for breaches. 

I discussed some of the other possible measures here. ]

It's all happening. 

How's your 2020 going so far?

Sunday 29 March 2020

A flicker of brighter news?

Testing ramps up

Australia has been ramping up its testing for COVID-19, with 22,154 tests reported as undertaken today.

There's a still selection bias at this stage, with a focus on imported cases.

Most of us don't or won't get tested unless we've knowingly come into contact with a traveller with the Coronavirus.

Still, at a total 228,054, Australia's rate of testing per capita is amongst the highest. 

Today a further 344 cases of COVID-19 were reported by 7pm, with more than half of those being located in New South Wales as cruise ship entries continue to show up in the figures. 

The equivalent figure yesterday was 460, and interestingly today's final result looks as though it could yet be about as low as we've seen for six days, which seems to be an anomalous result for a highly contagious virus (which one might generally expect to show an exponential increase in these early stages). 

Now, before anyone pops a champagne cork (or opens a now-rationed case of premix) there are a few other problems with these figures.

Firstly, test results may take 72 hours or more to be conclusive, so what we're seeing reported here doesn't equate to real time actual cases, but rather a snapshot of known cases based on a sample of tests undertaken some time ago. 

Furthermore, Australia was dismally slow to react initially, with travel from Italy only banned 18 days ago, and the controversial 'footy games' discussion taking place as late as March 13.

Given that people were still congregating en masse on Sydney's eastern beaches on March 20, and elsewhere even beyond this point, we might expect to see the ramifications of this flowing through over the next two weeks. 

Still, looking forward we should now at least be seeing some benefit of the travel ban and reduced travel more broadly.

And any day with a result like today, when looked at on a log scale, buys medical centres and hospitals valuable time, and brings us one step closer to flattening the curve.

Here's hoping for some more of the same this week, as we contemplate yet more time at home!

The elusive search for certainty

Search for certainty

Today we discuss the elusive search for certainty.

See here for more (or click the image below):

Saturday 28 March 2020

Flattening the curve (a 9-point plan for re-opening Australia)

COVID-19 figures

Globally there are now more than 657,000 cases of the Coronavirus, and more than 30,400 deaths.

On a global basis new cases continue to climb to 65,000 per day and rising.

With the exponential increase continuing, it's only a matter of time before total global known cases ascend to 1 million and beyond. 

On the positive side of the ledger, China appears to have all but eliminated new cases, and a number of other countries appear to have arrested the virus. 

Germany now has more than 58,000 cases, but its curve does now appear to be flattening.

Tragically, Italy has seen more than 92,000 cases and 10,000 deaths, but with luck here too the exponential growth may soon be curtailed. 

Spain's figures still look nasty, but the curve is gradually flattening. 

Increasingly the biggest disaster of all looks as though it might be in the US, where cases have exploded to 120,000 with little sign of any promising progress to date.

Australia shutdown

How about in Australia?

Today, new known cases increased by 460, taking total known cases to 3,640, with 14 deaths to date (mainly over those aged in their 70s or older). 

That does represent an increase from 370 new cases on March 24, which was four days earlier, but at this stage the situation doesn't appear to be deteriorating catastrophically.

Granted, a lot may change in this regard within a week or two. 

So we're by no means out of the woods yet, but for whatever reasons things do appear to be shaping up somewhat better in Australia than elsewhere.

And that's in spite of multiple cruise ship blunders and numerous earlier examples of flagrant disregard for social distancing rules.

And, indeed, it's in spite of more widespread testing per capita in Australia than in most other countries (Korea, Germany, and Russia have held more tests than we have, but of course their respective populations are far larger than ours, at only 25 million). 

Only a virologist can explain the possible reasons for this; perhaps the climate helps?

A 9-point plan for re-opening Australia

This is a global pandemic with global ramifications, but ultimately the world won't end, and figuratively speaking it'll be every man for himself when it comes to the critical question of how to kick-start national economies again.

Here's a 9-point plan for how we might be able to achieve it soonest and most effectively, from the perspective of a perpetually under-qualified blogger, should the daily figures begin to improve over the next fortnight:

1 - Initiate a shelter-in-place order

States already have shelter-in-place action plans, so these should be used immediately for all non-essential workers and businesses. 

The Aussie economy has effective already had a coronary, so it's now imperative to get daily new cases of the Coronavirus under control as soon as humanly possible.

The sooner we can do that, the sooner we can think about re-opening. 

2 - Wage subsidies

The government has spoken much about its 'stimulus packages the equivalent of 10 per cent of GDP', but the truth is much of this has been in the form of loan facilities and other non-cash items.

Whether by following a similar model to Boris Johnson in the UK or through another approach using the existing transfer system, the government must announce wage subsidies for stood down workers to keep them solvent until such time that the economy can be opened for business again.

Retail workers are being stood down at an alarming rate, while hospitality and tourism is also being smashed.

But these workers can return to work soon too, provided that they can be tided over with subsidies.

Furthermore, with Treasury or RBA funding, banks may also be better served over the medium term to offer interest-only mortgage terms at an interest rate of, say, 2½ per cent to any borrowers in distress, for as long as needed (in addition to the arbitrary 6-month payment holiday terms already being promoted). 

Interest-only mortgage terms with the use of an offset account can be an ideal means for families and other mortgagors to begin building up a safety buffer as get back on their feet from a financial perspective.

Rental relief measures will presumably also follow, perhaps implemented at the state level. 

These are extraordinary measures, but they're also extraordinary times.

Shutting down the economy is effectively a national disaster scenario, and it needs to be approached as such. 

3 - Set up a COVID-10 Delivery Unit

Create a dedicated COVID-19 Delivery Unit to purchase, import, manufacture, or find any other ways to both stockpile and circulate facemasks, surgical masks, respiratory equipment, ventilators, gowns, protective gear, and treatment drugs, and prepare as many ICU beds as practicable around the country. 

Even if the virus gets under control in the short term, there could yet be a second, third, and fourth wave, so it's better to go hard here rather than die wondering (for want of a better phrase). 

If there's available funding for testing and research into vaccines, cures, and effective treatments, then implement that too. 

4 - Fund a COVID-19 Testing and Tracing Unit

Australia must acquire millions of testing kits, and put in place widespread and rigorous testing and tracing regime, with an enforceable action plan for quarantining and treating those with symptoms, and tracing the recent contacts of any known infected persons. 

5 - Government messaging

Testing and tracing will likely need to continue long after the curve of new cases is flattened, and to this end government messaging should encourage Aussies to keep a daily journal of their movements, and a daily record of folks they may have had close contact with each day (this is a suggestion I read about at the excellent Calculated Risk, and as usual it's a very thoughtful one). 

One of the best-known finance authors once reportedly said that people need to hear simple messages over and over again before they truly sink in...a point with which I concur.

Therefore, appropriate messaging needs to be hammered home repeatedly on social distancing, the wearing of facemasks, washing hands, sanitising, hygiene, avoiding touching objects unnecessarily, and a raft of other key points. 

The wearing of facemasks has, to my knowledge, normally only been common practice amongst Aussies of Asian origin, but common sense says we should all consider adopting the practice (and maybe gloves too).

6 - Re-open local economies with few cases

The government faces the nigh on impossible task of balancing the public's health against the human and economic cost of keeping businesses closed.

Take the example of the capital city of Darwin.

The Northern Territory was already in recession before the COVID-19 issue surfaced, and now its borders must be closed and its businesses will be hit harder still by any restrictive measures. 

Yet the entire territory has just 15 known cases of the Coronavirus to date, and only one death.

At the appropriate point the towns and cities (and then states and territories) with the fewest cases will need to see restrictive measures lifted.

This can soon be an opportunity for Australia's regions to lead the economy forward again, which would make a pleasant change from the heavy reliance on Sydney and Melbourne of the past 7-8 years. 

Virus hotspots may need to remain shuttered for longer, but for towns and cities with the fewest cases the curfews and restrictive measures can be lifted soonest. 

7 - Re-open the Aussie borders, but with mandatory testing

The capability should exist to introduce and maintain mandatory testing for all entrants into Australia on an ongoing basis. 

It goes without saying that those showing symptoms will need to be quarantined and appropriately treated. 

On the one hand these measures may seem draconian, but on the other hand, what might the alternative look like? 

Many of the cases in Australia apparently originated overseas, so airports and the border are evidently a high risk area. 

8 - Allow businesses to re-open

As daily new known cases begin to decline, allow businesses and trading to re-open, but with social distancing still to be practised to the extent possible.

Businesses should be encouraged to allow staff to work from home where practicable, and group meetings discouraged where possible.

Moreover, an over-arching rule of common sense must apply. 

9 - An ongoing fight

It's not yet entirely clear whether re-infection is possible, or whether there will be second and third waves of the virus in those locations where cases of the virus have initially been controlled. 

Therefore, we must remain vigilant well beyond the point that the economy is up and humming again.

A balancing act

There is, of course, no 'right' way to do these things. 

Every day that companies or self-employed workers are closed for business inflicts more pain, so there are many challenging decisions to be made in real time by those in power to balance the potential risks versus respective health and economic costs. 

Only in hindsight will experts know what could or should have been done with more certainty, but this 9-point plan is what's swirling around my head tonight.

In short: 

-issue shelter-in-place orders until the curve of new cases is flattened;

-go hard, fast, and early to wage subsidies for workers and cash payments for businesses, with further mortgage and rental relief packages to follow;

-build up a war chest of medical supplies, and introduce a nationwide testing, tracing, and quarantining program;

-hammer home the 'best practice' messaging, and encourage record-keeping with respect to personal movements and contact with others;

-as daily new cases begin to decline, re-open locations and economies with the fewest known Coronavirus cases first, and gradually roll this re-opening out nationwide; and 

-enforce mandatory testing for all entrants to Australia, with quarantine as required.

Interested to hear your thought on this one.

Stay safe, everyone!

FOMO rears its head

Fear of missing out

Today a quick look at the fear of missing outon opportunities.

See here for more (or click on the image below):

Friday 27 March 2020

Weekend reads

Must see articles

This week at Property Update a look at the ban on public auctions and the likely fall in listings.

See here for more (or click on the image below):

You can subscribe for the free Yardney podcast here, where I'll be featuring again soon.

Jobs snapshot from February (wheels coming off)

Unemployment to rise sharply

A 30-second snapshot of February's labour force figures from around the traps.

There was more solid evidence that the labour force data were already deteriorating in Sydney and Melbourne before the Coronavirus kicked into gear. 

For context, here's what happened to the unemployment rate in Sydney between 2007 and 2009.

Unfortunately we're coming into this recession with far more unemployed persons than we needed to, due to both monetary and fiscal policy settings. 

Finally, the duration of job search was just starting to show the first signs of deterioration in February. 

These data will become much more meaningful from next month.

Stay safe and socially distanced everyone, and have a great weekend.

Show me the money (dividends)

Show me the money!

Today a look at why stock picking is statistically so tough (and how to go about it if you must).

For more, see here (or click on the image below):

Thursday 26 March 2020

Jobless claims explode to 3,283,000

US economy stops


3.283 million was the print for US initial jobless claims.

Terrible stuff.

All previous crises are a tiny blip on the radar by comparison.

It’s hard to compare with previous there's simply no modern comparison available.

The US unemployment rate could exceed 30 per cent by the end of next quarter, and Canada faces a similar mess.

Consumer-driven economies without consumers will lie in ruins for as long as the shutdowns continue.

Australia’s Coronavirus figures look somewhat promising, but in America they’re spreading far and wide from coast to coast. 

There are now more cases in the US than in China, or indeed any other country.

Co-ordinated stimulus

More so than in any previous crises this will result in co-ordinated stimulus packages on an unprecedented scale.

So far rates have been cut to zero, and we’re looking at an initial $2.2 trillion US government stimulus package, but more is likely to follow.

The Federal Reserve also dropped an initial salvo of US$700 billion in quantitative easing, and since it’s promising ‘QE infinity’ for as long as it takes, it’s impossible to know how much printing will follow (answer: a lot).

Small businesses and households, as in Australia, will need access to loans or other funds to tide them through to the other side.

It won't just be America going down this route.

All around the world government debt is set to soar and central banks are pushing interest rates down to zero. 

A number of markets have been crushed, but US stocks remain remarkably expensive given the unavoidable hit to earnings, with only really the energy sector looking of any interest.

Overall the expected returns on US and Aussie stocks are not yet of much interest at these levels and the bargains lie elsewhere. 

One step at a time, Australia needs to bring down cases of the Coronavirus first and foremost.


Some more old data.

Australian household wealth increased by +3.3 per cent in the December 2019 quarter, to hit a record high of $11.31 trillion.

The main driver in Q4 was a +3.9 per cent increase in residential property prices.

Aussie total household wealth increased by +10 per cent in 2019.

Australia's average net worth per capita hit a record high of A$443,000 by the end of calendar year 2019.

And the average or mean wealth per household had soared to well over A$1 million.

CoreLogic will report next week that housing prices increased in Q1 2020, including in the month of March 2020 itself.

However, property  activity will now stall, with open homes and auctions banned, and equities crashed in the first quarter of 2020 which will bring down superannuation balances significantly.

Meanwhile, unemployment looks set to least.

Reality bites

Jobless claims to spike

Lots of wild speculation in markets talk about whether this is 'the bottom' etc. before things bounce and get back to trending higher. 

The crowd usually wrong at the beginning, and at the end (and we're not at the end yet). 

You've got to admire the optimism, but we haven't even had the first read on how hard the global economy is going to be hit by the coronavirus, let alone what's coming over the remainder of 2020.

Tonight we'll get one of the first meaningful data points in the form of initial jobless claims in the US.

Here's some context for what we might expect to see. 

The short answer is that nobody knows until the figures drop at 8.30am NYC time.

But we do know it's not going to be good.