Population trends

The Australian Bureau of Statistics published population data for March 2021, which showed an increase in population of 21,000 people, to be 36,000 higher than in March 2020. The Corona crunch for population growth, which was 376,000 in the year to March 2020 (pre-crisis). So population growth has slowed to one tenth in approximate terms. Net overseas migration was -95,000 over the year, with natural increase of 131,000 over the year. In fact, the March 2021 quarter saw a little baby boom of sorts.

Interestingly, NOM was -53,500 in Victoria over the past year, whereas NSW only had an exodus of -13,500. That indicates the world’s most locked down city has taken a toll on residents. Many Aussies are moving interstate, while others are fleeing the country entirely.

The Chart above shows Victoria has shifted from being a net attractor of residents to now losing around 1,500 residents (net) every month. No small change. Queensland remains the preferred haven, with over 30,000 net residents gained over the past year. Who wouldn’t mind beaches, cheaper housing (though not by heaps admittedly), less lockdowns and better weather?

Other States are doing better as well, with South Australia, Western Australia and the ACT all swinging to positive NIM over the year ending March 2021. With current events in Victoria, this trend looks set to continue. It’s certainly interesting times if nothing else.

Until next time.

Iron ore crash worsens

Time to eat some humble pie.

I’ve been on record saying commodities were a preferred exposure this year. Markets were discounting sky-high prices as if they would quickly vanish. And perhaps, they are.

It’s been a truly precipitous decline for iron ore to have fallen by over half, from circa US$230/ton to US$100/ton.

Iron ore equities have been savaged, unsurprisingly. FMG, which I bought a few months ago at $22, is now in the $15 range (granted, its paid out a $2.11 dividend). But still, with the benefit of hindsight I was bedazzled by sky-high iron ore prices and massive dividends.

Australia’s majors will still be fine at US$100/ton. The bigger risk is something very sinister in China, such as a desire to cut out Australia’s iron ore industry, regardless of the consequences to itself in the process. It could prop up inefficient domestic iron ore production, prefer exports from Brazil and elsewhere, and leave Australia’s massive industry without its main buyer. No doubt, that would be a disaster, not just for share prices, but the Australian economy. Iron ore is our largest export and a rare bright spot in the CV-19 economy.

Perhaps its surprising the A$ has held up as well as it has, still buying over US72c. If iron ore continues to hurtle lower, surely sub-70c beckons, at a minimum.

On the positive side, the iron ore price looks like it might be at trend line support (see Chart above). Evergrande, an insolvent Chinese property developer, has caused a lot of concern (likely feeding into the IO crash through bad sentiment). Evergrande may alleviate some of its woes if investors take up the offer of discounted properties to redeem their owing investment money. And of course, in a communist country, the government may step in to avoid broader contagion.

At the moment, fear is high and so (at least from where I’m standing), it’s probably too late to jump ship on iron ore equities down by 30/40%. I’ll be riding out the storm. Thankfully, other investments have done better.

Housing roars higher

The housing market surged 6.7% higher in the June quarter according to ABS data to be 16.8% higher over the June quarter in 2020. Some truly remarkable rates of quarterly growth across all capital city markets. The weakest annual growth is 13% (Darwin) with some markets pushing 20% annual growth.

The market is now surging higher at rates not seen since coming out of the GFC in 2009.

Market positioning

Actions speak louder than words.

It’s a common adage for a reason. Whether we are talking about romantic relationships, friendships, or indeed views on the market.

Recently, a selection of Fed Presidents in the US have announced they are selling their shareholdings, ostensibly due to a conflict of interest / ethics concerns. It’s true they could be selling individual stocks to buy index funds thus still remaining positive on the market.

https://finance.yahoo.com/news/fed-officials-sell-stocks-avoid-224555386.html

Another much watched name, Warren Buffett, appears to have been downsizing his shareholdings over Q2.

Could I be jumping at shadows? Quite possibly.

However, markets have had a massive rebound since their March 20 lows. Further, risks seem to be intensifying – particularly political risk, which could lead to havoc in financial markets. For instance, vaccines mandates could lead to resignations and significant fall in employment/spending, that will flow through to share prices. If the mental health crisis continues unabated, suicides could rise, again undermining the economy/share market. It sounds macabre to speak so clinically, but I’m simply looking at the macro (the point of this blog).

Personally, with stock prices at all-time highs and risks elevating, I’d no longer be charging into the market right now. Keeping some powder dry may prove beneficial.

Housing market chugs on

Despite a rather surreal August, with much of the country locked in their homes for the vast majority of the day, the housing market kept moving higher. The five-city capital average advanced a strong 1.5%. The trend is a gentle slowing, but still very strong growth. Stock on market remains very low, indicating strong demand. The rental market remains tight (we touched on this a few posts ago) while mortgage rates are dirt cheap.

Canberra, Hobart and Brisbane (incl. Gold Coast) led the charge, all moving higher by more than 2%. Sydney (+1.8%) remained strong despite lockdown, as did Melbourne (+1.2%).

Housing finance data separately released showed lending remained extremely strong in July 2021, although it is no longer shooting higher. Banks would still be licking their lips with this amount of lending.

So far, the housing market remains bullet proof.

Iron ore stabilises

Following its free-fall, iron ore prices covered recently to push back over US$150/ton for the 62% grade.

Generally speaking, massive crashes straight down (35-40%) typically see a rebound – nothing falls in a straight line. Further, the fall was not sustainable either, we are talking about a vital industrial commodity, not a ponzi scheme crypto or stock. Iron ore, an input into steel, will remain in demand amid fiscal stimulus leading out of the CV-19 recession around the world.

And as mentioned in previous posts, generally we have seen an inflationary environment amid large scale monetary stimulus leading out of recession. The combination of fiscal and monetary stimulus bodes well for commodity prices in nominal terms. A continued crash in iron ore (e.g. 70 or 80%) would seem shocking in that context.

BHP has joined RIO in paying out a massive dividend of $2.74 per share, going ex-dividend shortly (2nd September). Since BHP shares have pulled back to ~$45, that represents around a 10% fully franked dividend on annual basis – huge in a zero interest rate environment. Clearly, the market is anticipating a pullback in commodity prices, or else the share price would be significantly higher than it is.

The bounce in commodity prices has led to the A$ edging higher again, now buying over 73c US.

The stabilization of iron ore is obviously a positive for Australia as concern grows over the budget damage amid widespread lockdowns. While many have acted as if ‘finances don’t matter’, the reality is another blowout deficit for budgets in 2021-22 adds to longer term pain for Australians. Rising public debt will necessitate higher debt repayments and the potential for taxes to increase and/or spending to fall in future years to repair the damage. This could show up in things like a move to broad-based land taxes or inheritance taxes, both of which have been raised. The piper will be paid.

Iron ore price crash deepens

Iron ore prices have continued their free-fall, likely to print below US$150/ton when the market updates tomorrow.

The prices of our majors were belted today: BHP – 6.35%, RIO -6.52%, FMG -6.15%. An expensive day for me as I enter one week in solitary confinement (lockdown).

“If something cannot continue, it won’t”. Iron ore has now lost a third of its price in a month. Mathematically, it cannot continue to fall at this rate, ergo it won’t. That may sound facetious, but it’s important to keep in mind. I remember I said the same to myself when the ASX fell from 7,000 to 5,000 quick-smart at the start of the crisis in 2020. I thought to myself, if it falls that amount again we will be below post-GFC lows – when the end of the world seemed upon us. Sure enough, the market bottomed shortly after and is now back over 7,000.

Yes, there are some valid concerns with iron ore. China is quite explicit that it wants to reign in excess production in the sector. Scrap is expected to play a more important role over time. Vale has had strong exports in recent months and new production is possible in Africa.

Yet, let’s think of the positives:

• China has a history of backtracking on reigning in steel production
• Massive money printing will raise the nominal price of commodities
• Input costs are starting to creep up, meaning the marginal cost of producers is also. That cuts the scope for opportunistic investment by new entrants.

All-in-all, the severity of the crash has surprised me a little. However, I’m not currently panicking or thinking of selling my positions. I’ll reinvest the dividends into stock at now discounted prices and watch how the market plays out.

Interestingly, lumber, another massive commodity price gainer has puled back massively too. That lends some credence to the ‘commodity bubble’ narrative. For some reason, I don’t see us entering into a bona fide deflation this year. Imagine the fat to be cut in the real estate market?

The sky darkens for Australia

The Australian economy has suffered twin blows in recent weeks. Much of the country is now under extreme lockdown conditions (martial law) while the price of our most important commodity, iron ore, has pulled back significantly from around US$220/ton to US$165/ton.

State and Federal Budgets were hammered in 2020 due to the economic dislocation caused by government policies. However, just as economic activity was improving, we have reverted back to the same dislocation. This is a body blow for many Australians, particularly small business owners and those in more tenuous private sector work. While personally I’ve been one of the lucky ones, I know there are many who are not.

The economic implications of recent lockdowns will be significant, particularly with no imminent end in sight. The mental health crisis the country is suffering is escalating. Many mental health providers are overwhelmed. Anecdotally I heard a helicopter rescue pilot devastated by a spate of cliff-jumpers in locked down Sydney; including teenage girls. For some reason, these stories and very real costs of lockdowns are not really making into major media outlets. One would hope they are not pushing an agenda of lockdowns, masks and vaccinations as opposed to looking at all evidence and arguments dispassionately. The censorship around counter-arguments is concerning.

The bottom line is the miracle iron ore price has wilted, while budget pain will come again due the loss of employment/taxation revenue from small businesses. The trajectory for Australia, politically and economically, looks less than great right now.

White to red hot

Australian property prices finished July 1.6% higher to be 14.9% higher than at the end of July 2020. House prices (17.7%) have outperformed units (7.1%) by a significant margin, with lifestyle preferences for more space amid WFH/lockdowns coinciding the with general shortage of detached housing relative to units.

Yet the rate of growth looks to be slowing in recent months. Even with current stimulus, increases at the rate of circa 30% per annum appear unsustainable. Now with interest rates anchored (as opposed to falling) and strong building relative to population growth (see my recent post on Housing Demand v Supply), the impetus has eased. There’s a strong psychological component driving prices at the moment, with many feeling the prospect of buying a home for under seven figures is rapidly disappearing. Could that change? Possibly. But it would likely need to come from a material shift higher in interest rates.

Most analysts’ (me included) outlook is for price growth to moderate as we approach the end of the year. That still leaves a gaping affordability gap and major pain for non-property owners at the time of fiscal/monetary stimulus in 2020. And no policymakers seem willing to tackle that problem. The social implication is increased social bifurcation and a gap between the wealthy (with multiple properties) and the rest. Younger adults without property-owning parents will struggle to attain home ownership it looks like, at least in ‘desirable’ locations or dwelling types.

Until next time.

Rio kicks off earnings

Rio kicked off H1 reporting for the major miners, announcing record-breaking profits off the back of a sky-high iron ore price. Underlying earnings was US$12.2 billion, with US$10.2 billion of free cash flow. The company has moved into a net cash position of over $3 billion. Rio is a debt-free, money making machine right now.

The company announced a monster interim dividend of US$5.61/per share (A$7.62). With a closing share price of $133.42 on Friday, that’s 5.7% of the share price (on a semi-annual dividend). The average realised price for iron ore was US$168/t over the half. And even though it has retraced a little sharply very recently (from US$220 towards US$180/t), needless to say it still remains at extremely positive levels for Rio. Its smaller aluminum and copper divisions also did well on the back of rising prices.

The announcement brings home just how profitable our mega miners are amid the current commodity price surge. Their volumes are high, costs are low and capital management prudent. They’re perfectly placed to deliver rivers of gold to investors. The market is keenly watching BHP and Fortescue for their announcements to shareholders after their H1.

The skeptics look to have had their pants pulled down as the crash in commodity prices remains elusive. Or if it does come, will miners have paid out so much cash to shareholders that it won’t really matter?

Disc: holds RIO