Rudi's View | Apr 05 2023
In this week's Weekly Insights:
-Don't Be Hoodwinked
-Consensus Targets, And Other Consequences
-Webinar on Copper
By Rudi Filapek-Vandyck, Editor
Don't Be Hoodwinked
It is easy to be flummoxed by financial markets. At times prices go down on good news, other times they rally on what looks like a negative impact.
Not making matters any easier: the way we, the humans observing these moves, interpret what is happening is mostly an extension of our own bias and predilection.
Hence, it's not difficult to identify the optimists in today's market. They'll tell you 2023 is poised for good news, because indices have refused to revisit the lows set last year. Inflation is coming down, albeit in a gradual manner, and central bankers are readying for a pause, followed by rate cuts later in the year.
Bitcoin and China are leading the rest of the world and financial markets. History shows the third year in the US presidential cycle is always a positive experience. Charlie Aitken at Bell Potter has already declared we are in the early stages of a fresh bull market.
That groaning you hear in the background is that of revered and well-respected investment experts a la Jeremy Grantham and John Hussman who keep warning global equities remain in an epic bubble. The Day of Reckoning, whenever it arrives, might well pull down markets by -50% (from today's level, not from last year's starting point).
Leaving the debate on today's asset prices aside, the most cited counter-argument by experts who do not share the bullish view at this point in time is that the true impact from more than 15 months of central bank tightening is yet to be felt in economies around the world.
The prime example of this in Australia is the so-called Mortgage Cliff that is only starting to genuinely gain traction this month (April). I was reminded recently that even on the RBA's own assessment, to date less than half (45%) of all RBA rate hikes put in place since early last year have been passed on by local banks to mortgage holders in Australia.
That RBA assessment includes both fixed interest and floating rates, though it is the first category that is usually referred to with the Mortgage Cliff term.
We can all speculate how much of an impact exactly this year's reset in mortgage costs will exert on household spending and housing markets, and there's always a chance things won't be as bad as one fears, but completely without impact it will not be.
As a cautious investor myself, it doesn't seem appropriate to make firm bullish calls on today's asset prices before we receive at least an early insight as to how this process is unfolding.
Admittedly, economic data to date can serve both bull and bear forecasters, and the long-anticipated slowing in economic activity certainly has remained a patience-testing experience.
But there are plenty of anecdotal insights suggesting the pressure on the economy locally is building, and cracks are starting to reveal themselves.
Yet equity markets, both locally and elsewhere, are rallying higher in what can easily be read as a message of 'the worst is over, let's move on'.
Human Nature
Markets are forward-looking, it's the most cited justification among today's optimists, but markets also live 'in the moment' which is why they move up and down on new input or the absence thereof.
Today's renewed upward momentum is not by default a positive assessment of what lays ahead for the remaining nine months of calendar year 2023. As a matter of fact, it makes a lot more sense when we look over our shoulder to what happened in March.
Signs of emerging banking stresses in the USA and in Europe have been quickly backstopped by governments and regulators, avoiding an all-out international fallout a la Lehman Bros back in late 2008. This is great news. Nobody wants a repeat of the GFC.
But very few sector experts are as naive to think there won't be any further consequences.
Similar to the aforementioned Mortgage Cliff, there are no concrete signals of what those consequences might look like, or when exactly they might show up, or where exactly. Markets don't have patience. If bad news is set to arrive in, say, three months' time, they'll deal with it then.
Right now, the threat of an imminent global banking crisis has been averted and thus it makes sense to price-out what was previously priced-in (i.e. to push share prices higher).
Life is never simply that straightforward, of course, and after seven consecutive weeks of falls, the lower starting point looks more attractive, on top of positive readings of 'technicals'. The way our human brains are wired, rising share prices improve our mood and act as an invitation to join in.
Plus there's always more in positives to look forward to... like a forthcoming pause in central bank tightening, or the fall in bond yields, or the prospect of possible rate cuts later in the year, or in 2024.
Similar to the example of last month's emerging banking crisis, these oft-cited 'positives' are only positives in the short term.
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