A Recession Portfolio Includes These Core Ideas

0 years ago The Daily Reckoning launched in Australia. We had one mission: to give you an alternative analysis of the finance news and to give you alternative strategies to profit and protect your wealth.

The underlying philosophy of The Daily Reckoning has been and always will be this: ideas matter.

Recently, I sat down with DR Managing Editor Dan Denning to discuss on very important idea for Australian investors: that the economy is in deep trouble.

It was a long chat. You can read part 1 here and part 2 here. Comments and feedback are welcome to [email protected]. But please, no birthday cards.

Callum Newman: You finished yesterday suggesting Australians will face structurally higher unemployment. That sounds grim for the economy. But what about the share market and the Aussie dollar and the government’s budget position?

Dan Denning: The dollar is easy. It ought to fall. I say that on the basis of what would be good for manufacturing companies. Their products would get cheaper overseas. But it would mean imports are more expensive.

That’s bad for consumers and by extension bad for retailers. Based on the fundamentals that were supporting the dollar in the last ten years, you’d think it would be a lot lower than it is. But it’s been supported by a lot of money coming into the country to speculate in the real estate market.

It’s important to point out, though, that the biggest factor on the dollar now is capital flows. It isn’t interest rates. It isn’t GDP growth. And it isn’t the government’s deficit or surplus (if we ever run one of those again). That’s the big wild card.

Anecdotally, I live in St Kilda and take the tram to work closer to the CBD, in Albert Park. A lot of the long-term stay hotels seem to be filled with Chinese tourists. And a lot of the new apartment buildings going up in the capital cities seem to have owners from overseas.

There is not a lot of exact statistical measurement of just how much money is coming in to Australia’s inner capital city real estate market. I think that’s by design, by the way.

I’m not sure the state governments, who love the stamp duty from rising house prices, want Australian citizens to know just how much money is coming up and driving up prices. But as I said, it’s hard to quantify what influence China’s middle class is going to have on Australia’s property market or on the tourism industry.

In basic economic ways, it could be a huge long-term benefit. But in social ways, like younger Australians not being able to get on the property ladder, it’s going to be more challenging. Either way, that’s the big wildcard for the dollar.

CN: And the government?

DD: As for the government, that’s a whole other story. But the short version is that spending will go up and revenues will go down. Expect bigger deficits forever from now on. That may put pressure on interest rates and the credit rating in the future. In turn that would affect how much banks pay to borrow money overseas. So you might see a slowdown in housing lending as interest rates rise.

CN: And the share market?

DD: Well, I can’t say I’m feeling great about the miners and the banks. Those are not growth businesses any more. But they’re priced that way. A lot depends on China. It could keep the price of commodities high for a while.

That would keep the valuations on mining shares high too. But my worry is that Australian investors—the ones who are in a default so-called ‘balanced’ super fund have way too much exposure to the miners and banks. In fact, they have way too much exposure to the Aussie market in general. It’s a huge risk. And they’re missing some big opportunities as well.

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