1) Oh, the irony of it all!
We now have an Albanese government and a bunch of independents with a mandate to elevate climate change ‘action’.
Here’s the catch for you and me: the immediate action on the ASX right now is in fossil fuel stocks!
Yep, Newcastle Coal set a record high last week, and stocks like Whitehaven and New Hope are minting cash. The free cash flow is huge!
And oil, despite the heavy selling across global stocks, is holding above US$100 a barrel.
That momentum hasn’t yet fed into the smaller stocks on the ASX in a big way. Their day may be coming.
One I cover operates in the US, so it’s not clear what effect a Labor government may have on it — if any.
We are also forced to wrestle with the fact that hydrocarbons still power the modern economy. Look no further than Sri Lanka.
It finds itself short of money and fuel. Literally — no fuel in the petrol stations. Naturally, the currency has been carted for six.
It’s not clear how this economic disaster is going to resolve itself. Central banks can create money, but they can’t build an oil refinery on the Sri Lankan coast any time soon.
If Albo thinks he’s taking the reins at a tough time, his Sri Lankan counterpart would tell him it’s a picnic.
Sri Lanka isn’t alone. The Economist reported the other week that flights and ‘lorries’ are being stranded in Africa for want of refined fuel.
Goodness knows what distress is going to manifest across the world if this continues.
The Russia and Ukraine situation is nothing but petrol on the bonfire. Reuters reports that Russia has cut off gas supply to Finland after they refused to pay in Russian rubles.
Now we have another country left to go to the international market for gas and pressure the price up further — or turn back to coal like Germany is doing.
In other words, the global energy situation is a dog’s breakfast.
The blame largely lies with massive credit creation of the central banks in response to COVID.
They have stimulated consumption with free money and then sit around wondering why the world is mired in an inflationary mess.
For years in The Daily Reckoning Australia, we said that the world would go from ‘Tokyo first, Buenos Aires later’.
That is to say, from chronic deflation to chronic inflation.
The tonic, according to conventional economics, is to raise interest rates to kill off demand.
Whether central banks can do that without crashing the markets and the economy remains to be seen.
I wouldn’t place too much money on a stable outcome, however. My colleague Brian Chu says gold is the game from here.
He’s scooping up cheap gold stocks and waiting for the gold price to respond to the inflationary pressure by moving up.
But there’s more to the defensive moves you need to make than that.
You can check out his latest moves with capital market veteran Jim Rickards here.
2) Now here’s a question for you: in these troubled times, is property a source of refuge…or danger?
You can make the argument for both.
Rising interest rates disrupt current valuations for property stocks like REITs because the discounted cash flow metrics change.
But property is also a ‘hard asset’ that can rise with inflation via capital value and incoming rents.
On a long-term basis, I’m more than happy to back property and property stocks to protect our purchasing power. Interest rate risks can be hedged, for example.
There may also be a rise in cash buyers looking for nothing other than sanctuary.
After all, the Russians have learnt — and now so has the rest of the world — that US Treasuries are no longer the ‘risk-free’ and neutral asset of global finance.
You cannot park your surplus money there without the risk, however minor, of US government policy fleecing or freezing you.
Foreign capital may look to hide elsewhere around the world, and stable countries like Australia and Canada could cop waves of this incoming money.
The Economist, for example, says many Chinese are looking to leave the dystopian nightmare they find themselves living in.
Australia isn’t just a nice place to live, it represents total freedom.
Any forced brain drain from China could see Australia capture a new wave of educated and motivated immigrants that go on to flourish as we saw in the 1950s and ‘60s.
I say let them bring their capital and expertise here. China’s loss would be our gain!
All the best,
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Callum Newman,
Editor, The Daily Reckoning Australia
