Emerging Markets’ Effect on the Aussie Economy

I finished yesterday’s Money Morning saying I would explain why the mainstream media is getting increasingly hysterical about Donald Trump. I’ll get to that in a moment. But first, let’s get stuck into some important developments in the Aussie economy

While the government continued to celebrate strong economic growth figures for the year to 30 June yesterday, the market fell another 1%. It’s trading at two month lows and is likely to fall below support, marked on the chart below.

A break below this level would suggest the market is heading into a correction phase. How big of a correction? Having an annoying inability to see the future, the answer is that I don’t know.

S&P/ASX 200-XJO 07-09-18

Source: Optuma

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But it’s worth considering some scenarios. The positive view is that stocks are just correcting a strong run that has occurred since early April. This was a period of strength for both resources and the banks. If that’s the case, a decline down to 6,000 or so points on the ASX 200 shouldn’t come as a surprise.

But what if something more fundamental is going on that we don’t really know about yet? This is the scenario I’m leaning towards, and it all comes down to the poor performance of the emerging markets this year.

I mentioned the trouble brewing in emerging markets yesterday. I’ve been following this all year for my subscribers at Crisis & Opportunity.

In short, emerging markets went on a debt binge during the age of quantitative easing. They borrowed heavily in US dollars. It turns out that European banks are big lenders to emerging market countries.

For example, Spanish banks have large exposures to Turkey and Argentina. And Italian banks have large exposures to Spanish banks. And French banks have large exposures to Italian banks. I think you get the picture.

The chart below shows the performance of Spanish and Italian stock markets in 2018. They are down around 9% and 6% respectively. That’s not too drastic, but it’s a big underperformance compared to US stocks, which are up more than 6% in 2018.

1 Day Relative Comparison 07-09-18

Source: Optuma

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How European emerging markets effect Australia

What’s this got to do with Australia?

Well, you probably saw yesterday that ANZ and the Commonwealth Bank raised variable home loan rates by 16 and 15 basis points respectively. That’s after Westpac increased its variable rate by 14 basis points last week. The NAB will be up next.

Cartel, anyone?

Aussie banks fund around 60% of their loans from local deposits. For the rest, they need to borrow in offshore markets, and our banks are very active in European debt markets.

In recent months, bank funding costs have increased. In my opinion, this reflects a few things. Firstly, it’s a sign of emerging market risk, and the potential flow on effect to the European banking system.

It also reflects the fact that the downturn in emerging markets is an indication that the global economy is slowing. That’s why the Aussie dollar recently hit its lowest level since mid-2016.

The Aussie currency is a growth sensitive currency. When the global economy decelerates, our dollar falls. And since peaking in January at over 81 cents, it has fallen 12%.

If this is telling us what the future is going to be like, there’s a good chance Australia’s economic growth has peaked for the year. And our banks are now paying a higher price for the increased risk that comes with this scenario.

In terms of an investment strategy to deal with this, you may want to look for counter cyclical plays. You may also want to look at formerly beaten down stocks that show good value relative to the rest of the market.

What’s more, consider looking at asset prices that have languished for a long period of time, but are showing signs of a recovery. These assets are out of sync with the global economy, and likely have the best chance of doing well while growth dependent assets fall.

Discover how to pick off potential multiple triple-digit ASX stock gains in ANY type of market. Join (free) today.

The Trump drain continues

As I showed yesterday and mentioned earlier, US stocks have outperformed the rest of the world over the past few years. That’s in large part due to Trump’s tax cuts and protection of the US economy by rolling back poorly structured trade deals.

But you wouldn’t know it judging from the hysterical mainstream media. Yesterday, The New York Times ran an unprecedented anonymous op-ed against a sitting American President.

A White House ‘insider’ (so the NY Times says) wrote a scathing piece that paints Trump as some foaming at the mouth lunatic, out of control and destroying the country.

But the raw economic facts don’t support it. Economic growth is booming, unemployment is at record lows, and the stock market is at record highs. That’s not all Trump’s doing. He came to office at the right time in the cycle.

But if his administration is so chaotic, would the US economy be so clearly outperforming the rest of the world?

To understand this epic hit piece on Trump, you have to put it in context. I’ve mentioned this a few times before, but it bears repeating.

Trump campaigned on a promise to ‘drain the swamp’. That is, ridding Washington of its deeply entrenched corruption.

The establishment media plays a part in this corruption by publishing stories that come from anonymous sources and ‘high up officials’. This is not a conspiracy theory. It’s a fact.

Look up Operation Mockingbird. This was a CIA initiated program designed to have the media create narratives. Arthur Hays Sulzberger, owner of the New York Times, was an original participant. You can check out more info here if you’re sceptical. 

So why did the NY Times run the piece yesterday?

There are a few reasons. Bob Mueller’s investigation into Trump’s alleged collusion with the Russians is going nowhere. In fact, it’s now surfacing that the Democrats and their deep state allies tried to frame Trump to bring about impeachment, although you won’t hear about that in the mainstream media.

Yesterday, Trump tweeted the single word, ‘TREASON?’ It was probably both in response to the article and the attempts to overthrow a democratically elected President.

As I’ve been saying for weeks, this is only going to continue to heat up. But if you don’t view it through the lens of what Trump is trying to do, you’ll get sucked into the mainstream media narrative. That is, that Trump is some deranged dictator.

Two more of Trump’s tweets in the past 24 hours give you an idea of the real battle going on.

I’m draining the swamp, and the swamp is trying to fight back. Don’t worry, we will win!’ and;

The Deep State and the Left, and their vehicle, the Fake News Media, are going Crazy – & they don’t know what to do. The economy is booming like never before, Jobs are at Historic Highs, soon TWO Supreme Court Justices and maybe Declassification to find Additional Corruption. Wow!

Brett Kavanaugh, Trump’s nomination for the Supreme Court, is set to receive Senate approval. This should give Trump the numbers on the Supreme Court and make things very uncomfortable for Hillary Clinton, given her past history.

Trump IS draining the swamp. And the swamp critters don’t like it.

If he succeeds, it will be ultimately beneficial for the US and global economy. But there might be some considerable turbulence in the short-term. That’s why this story bears close watching.


Greg Canavan,
Editor, Crisis & Opportunity

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Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

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 Greg Canavan’s Investment Advisory.

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.

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