ASX News LIVE | XJO Ends Flat as ‘Higher for Longer’ Era Sets In

Another week in the books.

Now onto AFL finals.

But before we switch attention to the MCG, here are some stocks hitting their 52-week high today:

• Origin Energy, up 55% for the year
• United Malt, up 48% for the year
• CVC, up ~30% for the year
• Horizon Oil, up 35% for the year
• Viva Leisure, up 35% for the year

And here are some stocks hitting their 52-week lows:

• CSL, down 10% for the year
• Scentre, down 7% for the year
• Resmed, down ~35% for the year
• Amcor, down 15% for the year
• Dexus, down 12% for the year
• Charter Hall, down 20% for the year
• Star Entertainment, down 70% for the year
• Block (owner of Afterpay), down 20% for the year
• Brainchip, down ~80% for the year
• Lake Resources, down 85% for the year
• Renascor Resources, down 45% for the year

A lot more stocks are hitting their lows than highs recently. A sign of the times. A bullish era this is not.

Here’s a great article from economist Catherine Rampell about why prices are never going back down.

For a time, and I’m not saying I’m proud of it, I subsisted on $5 Domino’s pizzzas at university.

But I shouldn’t expect those pizzas to cost $5 in the years ahead, let alone less than $5.

Rampell writes:

In the modern era, we’ve almost never seen price growth turn negative in the United States. Still, it’s not obviously silly to think big price declines might be possible. We’ve all seen prices for plenty of individual products swing up and down before.

This is quite common after an unexpected shock or supply disruption — e.g., last year, bird flu killed millions of chickens, and egg prices spiked; as flocks were replenished, prices fell back down. Same with, say, a hurricane knocking out an oil refinery and causing gas prices to temporarily rise.

So, individual product prices might fluctuate. But over the long run, the overall price level across an economy — basically, the average price of all the things consumers buy — still trends upwards. That’s by designn

Economists generally consider an upward trend in prices a good thing, as long as it’s happening at a modest, steady and predictable pace. Some limited level of price growth is believed to help facilitate economic expansion, reduce the risk of recession, and help businesses and consumers plan. For these reasons, for many years, the Fed has targeted annual price growth of 2 percent. That is, the Fed wants prices to be growing, just a little.

In fact, if prices overall are falling — or if inflation is so minuscule that prices look to be at risk of falling soon — it can mean an economy is in serious trouble.

For the interested, the RBA’s latest edition of the Bulletin is out!

The Bulletin is like the central bank’s research journal, where it publishes ‘insights into the economy and financial system from teams throughout’ the RBA.

Much of that research is quite interesting and neatly presented.

I wonder what the Bulletin’s readership is, though.

For the researchers’ sake, I hope its bigger than the readership of this tiny financial news blog.

ReNu Energy [ASX:RNE] released an ambitious investor presentation today, aiming to ‘strategically drive the transition to a low carbon future, through investing in renewable and clean energy technologies’.

At the foothills of its ambitions lies a plan to ‘create a hydrogen ecosystem in Tasmania’. From there, ReNu hopes to summit the ‘mainland’.

But can this minnow succeed?

RNE has a market cap of under $14 million and $1.3 million in cash on hand. The stock is down 80% since late 2021.

The vision is grand. But the market’s expectations are much lower.

This Monday, ReNu published its annual report. Given its cash situation, it had to justify why the report should be prepared on a going concern basis.

ReNu said the continuity of its business hinges on a successful capital raise ‘within the next four to six weeks’.

‘The ability of the Group to continue as a going concern is dependent upon completing a successful capital raise within the next four to six weeks. It is intended that the Company will undertake a capital raise by means of a placement to sophisticated and institutional investors with the intention to raise up to $5,000,000. Steps have already been undertaken towards completing this capital raise. The Directors believe completing a successful capital raise within the timeframe is reasonable based on steps already undertaken and the Company’s recent history in raising capital. The Group completed an oversubscribed private placement to sophisticated and institutional investors on 29 November 2022, raising $4,530,000.’

Management did say there is a ‘material uncertainty which may cast significant doubt over the group’s ability to continue as a going concern’.

Happily, ReNu said it has enough funds to ‘extinguish creditors and liabilities in the ordinary course of business for at least the next 12 months’.

BDO — RNE’s auditor — drew attention to this material uncertainty in its statement.

James Cooper details his recent visit around the famed copper mining district in Michigan’s northern Keweenaw Peninsula. An important copper producing region that once provided around 95% of America’s entire copper needs.

***

I thought I’d step away from the markets today and share a story from a trip I did while in the States last month.

It focuses on some historic copper mines along the Keweenaw Peninsula in the north-eastern state of Michigan.

These mines once contained the largest concentration of pure copper (also known as native or elemental copper) on Earth.

Here’s a picture of a 17-tonne pure copper boulder sitting at the front of a museum in the Upper Peninsula area of Michigan…

Source: James Cooper [Click to open in a new window]

So, what’s the big deal with pure copper?

Well, the metal is almost always found in sulfide ores. These are minerals harbouring many elements, copper being just a tiny fraction of the overall volume.

Some of these ores are so brilliantly coloured they resemble the multicoloured hues of peacock feathers…such as bornite, one of the highest grade copper ores available to miners.

To extract the copper, the ore is run through giant crushers to grind down the rock…

From there, the material is run through a processing plant that involves several steps including floatation, which liberates the copper from the waste sediments.

Of course, the miners in Michigan didn’t need to do any of this. Pure copper boulders the size of trucks were as good as money in the bank.

But this geological freak of nature holds some interesting mysteries…

The area is littered with ancient copper mines.

Incredibly, archaeologists have dated some of these mines as old as 5,000 years.

https://commodities.fattail.com.au/a-visit-to-michigans-ancient-copper-mines/2023/09/22/

The man behind the news is making the news.

Rupert Murdoch stepped down as Fox and News Corp chairman.

Murdoch built a sprawling media empire, but not every investment was a success.

Here’s a little blast from his past involving Theranos’s Elizabeth Holmes.

Rupert Murdoch emails Elizabeth Holmes

January 7, 2015 pic.twitter.com/zgYORuKCp9

— Internal Tech Emails (@TechEmails) September 21, 2023

I was reading Milton Friedman this week, who’s always insightful.

One chapter in his Free to Choose, co-authored with wife Rose Friedman, centred on cures for inflation.

The chapter is still fresh and relevant today.

Here’s the main idea:

‘Many phenomena can produce temporary fluctuations in the rate of inflation, but they can have lasting effects only in so far as they affect the rate of monetary growth.’

A historic detour serves as example.

Money has had many guises and forms through the centuries.

One was tobacco.

Tobacco was actually the basic money of Virginia and its neighbouring colonies, even decades after the American Revolution.

You could smoke it but also pay taxes with it.

But there was a hitch.

The original price of tobacco set in English money was higher than the cost — in English money — of growing it.

Money doesn’t grow on trees. But in colonial Virginia, it grew in tobacco crops.

And that’s where the trouble started. As Friedman summed up, the money supply grew literally and figuratively:

‘As always happens when the quantity of money increases more rapidly than the quantity of goods and services available for purchase, there was inflation. Prices of other things in terms of tobacco rose drastically. Before the inflation ended about half a century later, prices in terms of tobacco had risen fortyfold.’

Naturally, as prices of other goods in terms of tobacco soared, tobacco planters resorted to lobbying. And when that didn’t work, to violence.

At one point, desperate planters banded together and went around the country destroying tobacco plants.

The banditry was destructive enough that lawmakers decreed if ‘any persons to the number of eight or more should go about destroying tobacco plants, they should be adjudged traitors and suffer death.’

Growth of money supply the determining factor of inflation

The driver of inflation is the quantity of money per unit of output. If the growth in the quantity of money outpaces growth in output, prices will rise.

An important implication is the insignificance of productivity to inflation.

As Friedman writes:

‘What matters for inflation is the quantity of money per unit of output. But…as a practical matter, changes in output are dwarfed by changes in the quantity of money. Productivity is a bit player for inflation; money is centre stage.’

Productivity is vital for economic welfare, not inflation.

Source: Bank for International Settlements

https://www.moneymorning.com.au/20230922/the-cure-for-inflationand-its-side-effects.html

Judo Bank released its latest Flash Australia PMI Output Index, which rose to 50.2 in September, up from 48..0 in August.

The reading implies the Australian private sector returned to expansion this month.

Judo Bank’s chief economic advisor Warren Hogan said ‘we appear to be achieving the soft landing with few signs of a recession in manufacturing at this stage.’

Good news, at this stage.

Yarra Global Share Fund’s portfolio manager Iain Fulton spoke with Livewire’s managing editor Chris Conway last earlier this month.

A big topic was AI.

Is it set to be the next dot-com bust?

Fulton isn’t so sure.

“When we compare the rollout of the internet in the late 1990s that was financed and built out by heavily indebted telecom companies, versus today, the infrastructure rollout of AI is now financed by cash-generative, cash-rich businesses with zero debt and very large CapEx budgets.

“So you have $180 billion of CapEx between those top seven companies, plus private capital, that will come in to advance that hardware infrastructure rollout. So it’s early days, but it could potentially make some of these stocks quite good value.”

Fulton then said while the market has clear visibility on AI’s hardware infrastructure, it has less visibility on AI’s ‘killer applications’.

“I think where we have less visibility is what the killer applications will be. Back to 1999, we had the merger of AOL-Time Warner and they were the largest internet access company and one of the largest media companies at the time, and their killer application was going to be buying goods live from TV shows in the comfort of your own living room.

“Now, we buy goods online and we watch a lot of TV, but we don’t necessarily watch it in our living room, and we buy things from our phone. We have the sum of human knowledge in our pockets.

“The applications of that technology at the infrastructure rollout phase are unknown, and they do impact and penetrate more areas and more sectors of the economy relative to the previous cycle. We think exactly the same will happen in AI.

“It’s too early to tell who the winners from the applications will be, but we know that the infrastructure is going to be built out and there’s good visibility in the revenue cashflow and profitability in that effort.”

Excerpt from our editorial director Greg Canavan’s latest for Livewire.

***

The consensus is that we’re in for a ‘soft landing’. Therefore, there’s nothing to worry about! This soft landing narrative has come about in the past few months because of the US economy’s resilience and ability to defy constant predictions of recession.

Why has it been able to do this though?

Because the lingering effects of stimulative fiscal policy has offset the effect of monetary tightening. But the positive boost from fiscal policy is set to expire.

That’s according to an article published at the San Francisco Fed on 16 August this year. Here’s the important bit:

‘In a study earlier this year (Abdelrahman and Oliveira 2023), we examined household saving patterns since the onset of the pandemic recession. Our study showed that households rapidly accumulated unprecedented levels of excess savings—defined as the difference between actual savings and the pre-recession trend—relative to previous recessions. Our analysis suggested that some $500 billion of the $2.1 trillion in total accumulated excess savings remained in the aggregate economy by March 2023.

‘Since then, data revisions show noticeable changes in household disposable income and consumption, while new data releases indicate that consumer spending picked up in the second quarter. Our updated estimates suggest that households held less than $190 billion of aggregate excess savings by June. There is considerable uncertainty in the outlook, but we estimate that these excess savings are likely to be depleted during the third quarter of 2023.’

That’s in roughly two weeks.

In other words, monetary policy will very soon be acting without constraint, and the US economy is likely to slow sharply.It’s the same with Aussie households, with savings rates at the lowest point since June 2008.

Meanwhile, the US market is swanning about with barely a risk to consider. According to consensus estimates, 2024 calendar year earnings are set to grow 12% over 2023. Based on the 12-month forward consensus estimates, the S&P500 trades on a price-to-earnings multiple of 18.75.

That represents an earnings yield of 5.33%. The 10-year US bond yield currently trades around 4.3%. In other words, based on reasonably rosy forward earnings estimates, the stock market doesn’t offer much additional reward over ‘risk-free’ bonds.

This piece got very little interest when published last Friday (big green day for market). Always a good contrarian sign…

This bear market rally peaked in July – Greg Canavan | Livewire https://t.co/fRgyaPMKA5

— Greg Canavan (@gcanavan2) September 22, 2023

Are we entering a new era of 'higher for longer' interest rates?

Rising bond yields suggest investors are more confident inflation can return to target without a sharp slowdown.

But how confident should investors really be?https://t.co/LQd877Yicu

— Fat Tail Daily (@FatTailDaily) September 22, 2023

Motley Fool’s Scott Phillips tried to dispel anxiety about current market moves with this Tweet.

Will we remember today in a month’s time?

Probably not.

But I hope tuning out the noise doesn’t mean tuning this blog out…(and presumably, pieces in Motley Fool).

When the market opens today, shares will probably fall.

Again.

And yet, I don't think we'll remember today in a month's time, let alone a year or a decade from now.

Tune out the noise. Invest.#ausbiz #investing #longterm

— Scott Phillips (@TMFScottP) September 21, 2023