Petrol, Interest Rates, and the Problem with Being a Bear

Yesterday, I had to fill the car up. It doesn’t happen that often. I work from home, and so don’t drive much. And my wife, who does the school runs and general kiddy transport, takes care of the petrol levels in the other car.

I did notice, however, that the price of premium petrol that I use was higher than it had been for some time. $1.57 per litre. At least I thought it was.

So I headed over to the Australian Petroleum Institute to check out whether prices had indeed jumped higher or whether I had just been sleeping through the last few months of the filling up process — which wouldn’t have surprised me.

But it turns out retail prices have surged very recently. As you can make out from the chart below, prices have jumped over the past few weeks. They appear to be at their highest level since the start of the year.

Daily Prices for Unleaded Petrol, Australian National Average (52 weeks to 22 OCtober 2017) 25-10-17

Source: Australian Petroleum Institute

[Click to open new window]

This might not be a big deal. After all, the retail price of petrol has fluctuated in a narrow range all year. It simply looks like a case of retailers managing their margins.

But also note that the wholesale price (orange line) has been creeping higher since mid-year. That’s obviously thanks to a higher global oil price.

But more recently, you’ve seen weakness in the Aussie dollar versus the greenback, which increases the Aussie dollar price of oil and therefore petrol prices.

This hasn’t shown up in the wholesale price yet. Maybe these things act with a lag? But it should flow through soon. That is perhaps what the rising retail price is anticipating.

What does this have to do with anything?

Well, today sees the release of the consumer price inflation (CPI) data for the September quarter. Markets have decided that, due to recent weak retail sales data, the Reserve Bank will only increase interest rates if inflation comes in stronger than expected.

Ironically though, the things that could push inflation higher are in part the reason behind the weak retail sales.

Let me explain… 

Rising energy and electricity costs will likely show up as a major contributor to today’s CPI number. With wages growth stagnant, rising prices of essentials like electricity means there is less room in the wallet for discretionary spending. This is part of the reason why retail sales are so weak.

Throw in ever increasing costs of healthcare services and education, and many households are going backwards in real terms.

If the recent petrol price rises are the start of a trend (thanks to higher oil prices and a weaker Aussie dollar) that too will take another chunk out of Aussie households’ wallets.

These things all create ‘inflation’. But does it make any sense for the RBA to raise interest rates because of it?

No, it doesn’t. An interest rate rise in such a scenario would only slug households again.

So if today’s inflation data gets the market thinking about a near term rate rise, and stocks fall, you can safely ignore it. Any reaction to that effect will be the machines at work, not a thinking human.

At the least, the RBA will look through these sorts of price rises and judge them as a tax on the cost of living, rather than genuine, demand led inflation.

In fact, they will hope that higher prices (of just about everything), along with a pretty healthy labour market, will lead to a round of stronger wages growth. That is the type of inflation the RBA would like to see. Only then will they get serious about raising interest rates.

My guess is that will take some time. We will probably be well into 2018 before wages growth picks up.

That should provide a benign environment for the stock market.

In addition to that, you have ongoing strength in the global economy, as the latest batch of US earnings show.  From the Financial Times:

Confidence in the outlook for the world economy has been boosted by strong earnings statements from some of the largest US industrial companies, reporting strength in sectors including aerospace and construction.

Caterpillar, United Technologies, General Motors and 3M were among the companies that reported earnings above analysts’ forecasts for the third quarter, helping to push the Dow Jones Industrial Average to a new record high.

A number of companies cited strong or improving markets in China as an important factor in their results, but reports from North American and European markets were generally strong, too.

As I said yesterday, there are no certainties in the market, only probabilities. Being bearish in this environment is a low probability play.

Regards,

Greg Canavan,
Editor, Crisis & Opportunity


Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

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