TW3 – Rescuing Franking Credits

Market Wrap

US monetary policy was the dominant storyline in markets with week, with global shares trending slightly lower after the Federal Reserve indicated that it had no intentions to cut rates in the near future. After surprisingly weak inflation in Q1 2019, some investors had hoped that the Fed would toy with the idea of lower interest rates if inflation continued to trend lower. Alas, the Fed is happy to sit on its hand for now.

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El Presidente was not too pleased about the development!

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In local news, most commentators have concluded that it’s a matter of when, rather than if, the RBA will cut interest rates. Despite evidence that their policy of record low interest rates has done little for the Australian economy other than inflating a housing bubble, the RBA will persist with its belief that lower interest rates = higher inflation. Sounds awfully like that cliché about the definition of insanity

Finance 101 – Quantitative Easing

So what is this Quantitative Easing señor Trump is calling for? To summarise a previous Finance 101 on Monetary Policy, central banks attempt to steer the economy using interest rates, raising rates when the economy is running hot and lowering rates when the economy needs a boost. But what can a central bank do after it has lowered interest rates to 0%? Enter the largest monetary policy experiment in history – Quantitative Easing (QE).

Put simply, QE involves creating money out of thin air by having a central bank purchase financial assets. The idea is that by injecting cash into the financial markets, spending and lending will increase, which will kickstart the economy and create jobs. The USA’s central bank, the Federal Reserve, bought around $4t USD of financial assets (not a typo, they bought four trillion dollars of financial assets) from 2008-2014, whilst the European Central Bank purchased around €2.6t of financial assets from 2015-2018.

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So how did the largest monetary policy experiment in history pan out? Much to the bewilderment of the world’s top economists, global economic growth has been mostly anaemic since 2009, particularly in the economic zones that have had the largest QE programs (USA, Europe, Japan, etc). Looking back on its track record, it appears that QE is simply trickle-down economics on steroids – create trillions of dollars out of thin air, make rich people richer by purchasing financial assets off them, and hope that some of that money makes its way to the real economy.

No wonder Trump is calling for more QE – it creates more of the wealth inequality that prompted his base to vote for him!

 

Quarterly Review of Investment Markets and Portfolio Settings

For those who may have missed our earlier correspondence, please find our Quarterly Review of Investment Markets and Portfolio Settings here. The Review covers the performance of our model portfolios for the first quarter of 2019, whilst detailing the adjustments made to portfolios for the upcoming quarter.

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What Happened Next?

Some clients may be apprehensive to top up their allocation to shares after the roaring run they’ve had in 2019, surely they must be due for a correction? We have put together a collection of charts that compare our present circumstances to similar instances in the past!

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Sydney Still Sliding

The Sydney property market continued to slump in April, with the only encouraging news for property investors being that the rate of monthly decline has been trending lower recently. Property in the harbour city is now down 14.5% since peaking in July 2017, whilst Melbourne has fallen 10.9%.

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Source: Corelogic

Left or Right For Returns?

In our recent guide to Budget Bull****, we concluded that neither Labor nor the Liberals are better managers of the economy per se, but what about the sharemarket? Our Chief Investment Officer Ashley Owen has delved into the archives to analyse how the sharemarket has performed under different governments since Federation, ultimately crediting Australia’s stable government robust public institutions for Australia’s prosperity.

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Would I Lie To You?

On the subject of bull****, Australians are apparently pretty proficient at it, with only Canada and America besting our efforts in a recent research paper on bull****!

15-year-olds in nine English speaking countries were asked how familiar they were with a number of mathematical concepts, including made-up concepts such as subjunctive scaling and declarative function. Countries were then ranked on how often respondents claimed familiarity with the fictitious concepts.

Unsurprisingly, males were more likely to bull**** than females!

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Archibald Prize 2019

The winner of the Archibald Prize will be announced next Friday, with 51 finalists vying for arguably Australia’s most prestigious art award. You can view each of the submissions here.

Which portrait do you think will win? Send through your prediction and if you get it right we’ll send a bottle of red your way!

Perth based artist Tessa Mackay’s portrait of Australian actor David Wenham (best known for playing Diver Dan on SeaChange) has taken out the Packing Room prize, which is voted for by gallery staff who set up the exhibition.

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Name That Line!

Congratulations to Lawrie and Janet for correctly guessing last week’s Name That Line!

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But what was the classic line in this scene?

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Pic of the Week

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Video of the Week – The Things Kids Say!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

 

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