“We’re now almost addicted to the numbers every day – ‘How many new cases? How many deaths?’ – which we didn’t have with influenza and we don’t have with motor vehicle accidents. We’re absolutely paranoid about this virus.”
The words of Qantas chairman Richard Goyder interviewed in this morning’s Financial Review. Goyder talks about the unfolding mental health crisis that has been created by our national obsession with the Covid-count. Particularly hard hit are our young adults – those in their 20s who have finished school but have not yet settled down to family life. Youth unemployment is now above 20%. No one is hiring, nothing is open and there is nowhere to go. In Victoria, there has been a 23% rise in mental health patients admitted to emergency departments. Demographer Bernard Salt summed up Australia’s risk averse culture succinctly with this post. My observation, as a European who has lived (happily) in Australia for 14 years now, is slightly different. Australians are just as risk-loving as Europeans (how anyone can ocean swim amidst a sea teaming with lethal creatures is beyond me) but are more respectful of government and far more law-abiding. Europeans tend to treat anything that comes out of the mouth of a politician with a healthy dose of skepticism. We need a plan to exit lockdown in Melbourne and to restart life elsewhere. Everyone needs to be able to see and plan their future.
After 29 Years – Australia Enters Recession
Australia is officially in recession for the first time since 1991 after posting a 7% fall in GDP for the June quarter. The ‘official’ definition of a recession is two consecutive quarters of negative growth and the June contraction follows a 0.3% decline in the March quarter, bringing a remarkable run to an end. However, the data release revealed some bright spots. The national savings rate rose to 20% from 6% and companies had a record quarter, mainly because of the various government support packages. Remarkably, household income actually rose slightly due to the social assistance benefits.
Desperately Seeking Inflation
The Fed’s great 1980s inflation slayer, Paul Volcker, died last year, aged 92. Last week, the Fed’s current boss, Jerome Powell, buried Volcker’s legacy once and for all. When Volcker became Fed chairman in 1979, inflation was running at a devastating 15%. In response, he hiked interest rates above 20% and left them there. Can you imagine a 20% mortgage rate today? The challenge facing Powell is just as difficult but the polar opposite – inflation has been absent without trace for years. People have stopped worrying or caring. Last week, the Fed made the decision to allow inflation to run above 2%. It might not sound much, but this statement represents a seismic change in strategy first put in place 40 years ago. ‘Zero interest rates forever’ sounds great but it means asset prices (equities and property) have soared, whilst wages have stagnated. The rich getting richer and all that.
In case anyone is in any doubt about the impact liquidity has on share prices, take a look at this chart below. ‘Liquidity’ is fuelled by zero interest rates and central bank bond buying (QE). Liquidity is like morphine – great if used sparingly and only in case of emergency, but overuse desensitises the patient and can cause nasty side effects. Read the label.
The Weak Link Between Profits and Share Prices
Apple’s share price is up more than 400% over the past five years. You might (logically) assume that its sales and profits have grown by a similar amount since 2015? You might assume that. But you would be very wrong. During that period, Apple’s earnings increased just 9.4% and its revenues grew by 17%. So why has its share price soared? Well, at the beginning of last year the stock market valued $1 of Apple’s earnings at $12 (a Price/Earnings ratio of 12) – today that same dollar is valued at $40. And such is the challenge of share investing – it’s less about picking companies with great revenue and profit growth potential, and far more about forecasting which stocks the market will fall in love with in the future. Not easy!
Happy Father’s Day!
Wishing all our Stanford Brown and client fathers the happiest of Father’s Day on Sunday.
Dad, if you’re reading this (and I know you like to offer me ‘helpful comments’ on how my writing could be improved), sorry I can’t be there with you this year in England but I will see you soon.
Here’s a gorgeous video of 4-year old Flynn playing golf with his dad and shooting his first hole-in-one. I hope this brings a smile to your faces!