A caveat or warning first: I’m clearly engaging in confirmation bias. That is, out of all the information available out there on the interweb, I found something that suits my story.
Duly warned, here it is…
The chart below shows the year on year performance of something called the smart money flow index and the Dow Jones Industrials. As you can see, the smart money flow index has just plunged. Given the decent correlation with the Dow over a long time frame, there’s an increased risk that you’re going to see another leg down in US stocks very shortly.
Source: Peak Asset Management
[Click to open new window]
What does the smart money flow index represent?
According to the WallStreetCourier:
‘The Smart Money Flow Index is calculated according to a special formula by taking the action of the Dow in two time periods: the first 30 minutes and the last hour. The first 30 minutes represent emotional buying, driven by greed and fear of the crowd based on good and bad news. There is also a lot of buying on market orders and short covering at the opening. Smart money waits until the end and they very often test the market before by shorting heavily just to see how the market reacts. Then they move in the big way.’
Before getting too carried away with what this is saying, remember that the market is way too complex for any one indicator to nail it. In fact, the more successful an indicator is, the closer it comes to being obsolete, or just wrong this time around.
Whether that’s the case here, I don’t know. But it’s a warning I’m taking seriously.
Let’s move on now to Australia. Yesterday, the RBA keep rates on hold again. The move was unsurprising given the slowdown in the housing market. But it just goes to show how fragile the underlying health of the economy is when the RBA expects to see economic growth reach 3% this year, but has kept interest rates at 1.5% for nearly two years.
Clearly, they have an eye on the property market. They are concerned about the impact of falling asset values on consumption, which accounts for around two-thirds of economic growth. This is happening at the same time as doubts emerge about other growth drives in the economy.
As The Australian reports, investment spending may be starting to wane:
‘Doubts are emerging over the strength of non-mining business investment, which has been one of the biggest supports to economic growth over the past year.
‘Both Treasury and the Reserve Bank are counting on further strong growth in non-mining investment over the next two years and see the potential for it to rise more rapidly than their central forecasts. However, last week’s business investment report raised questions about the durability of the recovery. Forecast investment growth was soft while a slide in non-residential building approvals suggests the construction boom may have peaked.’
In addition, there is a risk that commodity prices might come off the boil after a very strong run over the past few years. From the Financial Review:
‘China’s debt crackdown is a key risk to the country’s economic growth and will have significant knock-on effects for the global economy, particularly emerging markets with high commodity dependence or close Chinese trade links, Fitch Ratings said.
‘Beijing’s campaign to put a lid on debt could also lead to a sharp slowdown in business investment, Fitch said late on Sunday, forecasting that growth in the world’s second-biggest economy would slow to around 4.5 per cent over the medium term.’
A China led commodity slowdown would remove another source of stimulus for the Aussie economy at the worst possible time.
Right now though, the concern is the property market and while that is the case, the RBA won’t budge on interest rates.
In a sign of how much the property market has slowed recently, apartment king Harry Triguboff has turned to the Financial Review to tell everyone how tough things are, after spending the best part of 12 months feeding his views to Robert Gottliebsen at The Australian.
Surely Harry knows his game is a cyclical one?
That hasn’t stopped him panicking about the ‘attack’ on the banks via the Royal Commission. A less charitable opinion would be that the banks have brought this on themselves. From the AFR:
‘“There is nothing wrong with our banks, I promise you,” Mr Triguboff told The Australian Financial Review. “I assure you they make mistakes, so do we all. But there is nothing wrong with them. They are shell shocked and if affects all of us.”’
If by shell-shocked he means they pulled the pin on their own grenades and let them explode close by, then fair enough. But this is hardly a hatchet job on the banks. Corruption and unethical behaviour is simply what happens when you let the easy money spigot run for so long.
Triguboff thinks the banks are unnecessarily tightening lending standards, restricting the flow of credit to the housing market. Relative to boom times, they are. But that’s how a cycle works.
Moreover, Triguboff’s comments highlight the asymmetrical nature of the banking industry. That is, when times are good, the bankers and landowners win, but when things are rough, ‘it affects us all’.
This is exactly why banks should be subject to tighter regulation. The provision of credit is a public utility. The problem is that regulation usually hits at the peak, and exacerbates the downturn. It’s rear window stuff, like most regulation is.
But let’s put things into perspective. Property has had a very strong run over the past five years. A pullback shouldn’t be anything to be concerned about. It’s when the pullback becomes something more — where it eats into household equity and impacts bank balance sheets — that you should become concerned.
Thankfully, we’re nowhere near that just yet. But that’s not to say the Aussie economy hasn’t peaked for the moment. In my view, a slowdown beckons in the second half of the year.
Oh. Last but not least…go the Blues!
Editor, Crisis & Opportunity