Why You Can’t Afford to Stay in Cash

Yesterday I looked at the US election aftermath.

Today, let’s focus on Australia, the good and the bad.

Firstly, the bad:

Assuming Biden gets the presidency handed to him, in my view it will embolden China to take even more aggressive action against Australia on the trade front.

It’s already happening. From The Australian:

China has escalated its trade assault on regional Australia, banning Victoria’s $260m timber trade and leaving the state’s forestry industry in despair.

At least two shipments expected to depart this week from Portland, a city of 10,000 in the state’s west, have been cancelled after Chinese authorities said a pest known as bark beetle had been detected in earlier cargo.

Portland locals fear the suspension is the latest instalment in China’s sweeping trade retaliation campaign, a fortnight after Queensland timber was banned and as restrictions on wine and lobster exports loom.’

And the Financial Review reports today that:

The chairmen of two of the nation’s biggest companies have warned the breakdown in relations with China is a “tinderbox” which threatens Australia’s most valuable exports, including oil and gas and iron ore.

Woodside Petroleum chairman Richard Goyder said he was deeply worried about the withdrawal of Chinese investors out of Woodside’s process to sell a stake in its $16 billion Scarborough gas project in Western Australia and warned the $100 billion iron ore export sector was not immune to the trade spat.’

So far, China’s moves are enough to inflict pain on local communities and politicians. It’s clearly a message to Australia for calling them out on their appalling handling of the virus they let escape into the world.

But the real pain is coming a few years down the track, when China access Africa’s iron ore reserves. Right now, they don’t have an alternative. Just know that it’s coming.

But as far as iron ore goes, it looks like it’s already peaked. To show you what I mean, take a look at the chart of Rio Tinto Ltd [ASX:RIO]. The share price peaked in June 2019. It’s tried to break through that level on two occasions this year, only for selling to come through and knock the share price lower.

The shares rallied on news of a Biden win (bizarrely), but in my view they’re headed lower. (Disclosure: I have recommended BHP and RIO as a short sell to subscribers of my Crisis & Opportunity report.)

Port Phillip Publishing

Source: Optuma

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The rationale is that the iron ore price is likely to fall and increasing supply from Brazil will hurt Aussie producers.

The other reason is that China’s latest five-year plan calls for great reliance on domestic production and consumption leading to ‘quality’ growth over quantity. It’s fair to say that pulling the fixed asset investment level, which benefited iron ore, refers to the ‘quantity’ growth angle.

The risk to this outlook is that China struggles to generate the growth it needs by going it alone. At that point it can always return to ordering local governments to build apartments, railway tracks, bridges and airports.

But I think iron ore prices fall substantially before that happens.

You can see this shift taking place in the ASX 200 Resources index:

Port Phillip Publishing

Source: Optuma

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The sector bounced strongly from the March lows, as China funnelled massive amounts of credit into fixed asset investment. But the sector peaked in August.

This brings me to the good news.

While resources (by that I mean iron ore really, given its dominance over the sector) look fragile, domestically focused Aussie stocks are far more attractive.

The continued recovery from the shutdowns, the billions thrown at the economy by the government, and (insane) monetary largesse from the RBA all point to a bullish outlook for the stock market.

That’s not just my opinion, it’s the opinion of the market.

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Cash is risky and stocks are safe!

Look at the ASX 200 below. After trading sideways for nearly six months, the index broke out to new highs this week:

Port Phillip Publishing

Source: Optuma

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As you can see below, the financials (mainly the big banks) were the driving force behind this week’s big move. Expect to see profit taking come in and the index to fall back toward the breakout point in the next week or so, but I suspect it will be a good point to buy.

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Aussie stocks are relatively good value here. Bond yields are below 1% and returns on cash are negligible. Good businesses generating cash flows and paying dividends will become increasingly popular as the market realises the worst is over.

That doesn’t mean the economy is good!

In fact, it’s probably sicker than ever. That’s why the RBA is headed down the QE rabbit hole with all the other idiot central bankers and why the government will increase our debt-to-GDP ratio for years to come.

It doesn’t matter that their actions will only make things worse. As long as the cash keeps flowing through the economy, the market will ignore the increasingly brittle economic foundations and hide in the relative safety of large-cap stocks.

That’s right. Authorities have managed to tip the world on its head in their attempts to improve it. Cash is risky and stocks are safe!

That may sound ridiculous. On the face of it, it is. But give it a few years. With the benefit of hindsight, you’ll see that that is exactly what they’ve done.


Greg Canavan Signature

Greg Canavan,
Editor, The Rum Rebellion

PS: If you missed yesterday’s interview with Jim Rickards, discussing the wash up of the US election, check it out here.

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

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