It feels like the investment world has been listening to the Hedgehoppers Anonymous 1965 song lately; where good news is bad and vice versa. One can be forgiven for having to ponder why investment markets have moved in unexpected directions this year. I’ve seen equities rise on news that we’re going into a recession and defensive investments being sold off because a recession isn’t happening quickly enough. Isn’t a recession bad? Don’t shares fall and bonds rise on bad news? Well, maybe, but it’s only part of the picture…
Since the GFC (now 15 years ago!), we’ve become used to low interest rates thanks to low inflation. While those economic influences were stable, investors have been able to focus on (and bicker about) equity values based on demand/supply, cashflow, p/e ratios etc. For much of that time, controlled unemployment levels have meant that there’s work out there if you really want it, and for business owners, the employee pool has been deep enough to grow if they wanted and without having to pay massive wage increases.
With the awakening of the sleeping giants (inflation and interest rates) last year and with markets expecting some recessionary pressure this year, we’ve been hoping for interest rates to fall. But, in Australia at least, we now have low unemployment, a falling dollar (imports become more expensive) and a super high level of household indebtedness. We’ve also increased immigration to help the talent pool but don’t have enough houses for everyone so the cost of housing goes up, which pushes inflation up meaning home buyers need to borrow more at a higher interest rate which in itself is inflationary, meaning interest rates may stay up longer. Try reading that last sentence out aloud, it’s a mouthful…
Thus we want deflation..? Nooooo. People lose money when values go down; businesses have their margins squeezed, job losses result, household incomes suffer etc. Just look at sheep and cattle farmers at the moment where the value of their livestock has more than halved. In some parts of the country, a sheep worth $200 last year is now getting $30. So are lamb chops getting cheaper? Not yet! The cost of running the abattoir, the supply chain, the butcher and the supermarket are all skyrocketing because the cost of labour has gone up with inflation and still they can’t get enough people to do the jobs. Deflation is not pretty and likely hurts everyone in the long term.
So how does this affect one’s investments? Well the market wants a delicately balanced outcome of just a little bit of annualised inflation but only enough that we can expect a drop in interest rates. Then, ideally both equity and bond markets can feel some improvement. However to do that is like piloting an A380 Jumbo where the flying bit is easy but the landing bit is hard; markets panic when approaching too steep or shallow (aka Hedgehopping) even if it’s heading in the right direction.
The good news is we get to put faith in our hedgehopper pilots, namely the government and the RBA. No wait… that’s the bad news. The good news is that any news is good news and the more bad news we have, the better it has to get!
Your call to action from this article is to fire up the bbq with friends this upcoming summer, help a farmer out by buying local produce and talk about how lucky we actually all are… and for good measure play my favourite bbq tong-master song “Turn, Turn, Turn” (also 1965) to remind us that to everything, there is a season.