ASX News LIVE | XJO to Rise, US Inflation Cools as Markets Eye End to Rate Hike Cycle

Extract from Peter Bakker’s First-Mover Algo Alert.

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By comparing longer-term averages of the prices of copper and gold, the copper-gold ratio can provide valuable insights into the overall health of the global economy.

A rising copper-gold ratio (i.e., copper prices rising relative to gold prices) often indicates an expanding economy, as it suggests that industrial demand for copper is outpacing the demand for gold as a haven.

Conversely, a falling copper-gold ratio (i.e., copper prices falling relative to gold prices) may signal an impending economic slowdown or recession, as it suggests that investors are becoming more risk-averse and seeking the safety of gold.

As you can see in the below copper-gold ratio compared with the S&P500 graph, the ratio and the markets are well correlated…until they aren’t.

When we went defensive in April, the ratio kept deteriorating at a fast pace. However, the equity markets took another path. Since June, however, the ratio has been going up, and the correlation has been re-established.

Source: Trading View

Ryan Dinse and Ryan Clarkson-Ledward, who helm the Exponential Stock Investor service, just released a fresh note. Here’s a snippet.

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Part of becoming a better exponential investor involves learning how to think differently.

Not just any kind of thinking though, we’re specifically talking about extrapolative thinking. The ability to think outside the box, as the saying goes.

You want to be able to see possibilities others can’t…

Identify opportunities most ignore…

And predict what everyone else isn’t…

Of course, it sounds far easier than it is to actually do. It takes a lot of practice to become adept at this kind of forward-looking thinking.

But if you can hone this unique skill, it can become one of your greatest assets.

It just might give you an edge to spot a great stock before the market realises it. Or, in even rarer cases, it might even reveal an opportunity that even the business itself hasn’t cottoned on to yet…

In a dispersed and atomised society, memos from Oaktree Capital’s Howard Marks offer fleeting moments of unison.

Fundies, journos, punters — the investment community at large — gathers together to read Marks’s latest thoughts on the market.

Earlier this week, Marks published his latest memo, Taking the Temperature.

Some excerpts:

Hopefully we learn from our experiences as we go through life. But to really learn from them, we have to step back on occasion, look at an entire string of events, and figure out the following: (a) what happened, (b) is there a pattern that has repeated, and (c) what are the lessons to be learned from the pattern?

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It’s very easy for something that’s a little overpriced to go on to become demonstrably more so, and then to turn into a raging bubble, and vice versa. In fact, if we could rely on small mispricings to always correct promptly, they would never grow into the manias, bubbles, and crashes we see from time to time.

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So, one key is to avoid making macro calls too often. I wouldn’t want to try to make a living predicting the outcome of coin tosses or figuring out whether the favorite will cover the point spread in every football game over the course of a season. You have to pick your spots – as Warren Buffett puts it, wait for a fat pitch.

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Everyone can study economics, finance, and accounting and learn how the markets are supposed to work. But superior investment results come from exploiting the differences between how things are supposed to work and how they actually do work in the real world. To do that, the essential inputs aren’t economic data or financial statement analysis. The key lies in understanding prevailing investor psychology.

For me, the things one must do fall under the general heading of “taking the temperature of the market.”

Alliance Aviation Services [ASX:AQZ] is up ~14% after a FY23 profit update.

The aviation services firm expects FY23 underlying profit to exceed previous guidance, now forecasting underlying net profit before tax of $56.9 million. That’s up from the original guidance range of $50 to $55 million.

Alliance said ‘flying activity has increased in the second half of FY23, as additional aircraft have been deployed into service under contracted wet lease arrangements.’

Wet lease?

In aviation jargon, leases are either wet or dry.

Wet leases are leases of aircraft with at least one crew-member. So a dry lease is a lease of an aircraft without any crew-members. The General Aviation Manufacturers Association put it this way:

‘Under a wet lease, compensation paid for the lease is the payment for an air transportation service, similar to riding in a taxicab.’

Paul Krugman doesn’t have the best reputation among some of our editors here (Ryan Dinse, especially).

But the Nobel Prize-winning economist does have some interesting things to say about the economy.

Yesterday, in his New York Times column, Krugman questioned where the repeatedly predicted recession is.

‘It sure looks as if economists made a bad recession call. Why were they wrong?’

Krugman then made some great points about the deeply inverted yield curve:

‘I know that at least some forecasters were looking at a certain financial indicator: the spread between short-term and long-term bonds. An inverted yield curve, in which long-term bonds pay lower interest than short-term, has historically predicted recessions, as becomes clear if you note the years in which that happened in the following chart:’

Source: FRED

‘But the meaning of an inverted yield curve is widely misunderstood. It doesn’t cause a recession. It is instead an implicit prediction about future Fed policy — namely, that the Fed will cut rates sharply in the future, presumably to fight a deepening recession. So the inverted yield curve wasn’t really independent evidence, just a market reflection of the same ‘recession is coming’ consensus you were hearing on cable TV.’

Krugman then listed some candidate reasons for the wide consensus a recession was imminent.

Yet no explanation was definitive. Krugman remains stumped:

‘In any case, something really strange has happened. I can’t think of another example in which there was such a universal consensus that recession was imminent, yet the predicted recession failed to arrive.’

The government has just approved its latest ‘offshore wind zone’.

The 1,800-square kilometer patch of ocean, offshore from the NSW coast, is the second such area of its kind. It’s a new zone that will soon be tendered to be filled with wind turbines to power local homes.

And while the space is smaller than initially proposed, it is still sizeable.

By 2030, it is hoped that it will be able to generate up to five gigawatts of power — a hopeful replacement for the recent shutdown of the Liddell coal plant in the region.

Energy minister Chris Bowen was certainly trying to sell the idea on its job-creating potential.

As he put it:

‘The Hunter is undergoing significant economic change, and the prospect of creating new job opportunities for decades to come through a new offshore wind industry is a game changer,

‘Today’s declaration opens the door for a new industry in the Hunter, which could create over 3,000 construction jobs and another 1,560 ongoing jobs.’

We’ll have to wait and see if these benefits do indeed end up flowing through to the local community. But I certainly wouldn’t be surprised if — like the turbines themselves — this all just involved a bunch of hot air…

The cost of net zero

See, what’s frustrating about politicians’ ongoing push toward renewables is the short-sightedness of it all.

They can zone and declare sites like this offshore wind farm all they want, but it doesn’t change the fact that the materials needed to build them are rapidly rising in price.

The International Energy Agency (IEA) put this in clear view with the release of a recent review. The detailed report analysed the ever topical ‘critical mineral’ market.

And it’s damn clear from their findings that demand is leading to much higher prices.

Just look at the acceleration in these five minerals over the past five years:

Source: IEA

Copper has been the biggest market to revel in the renewables boom. Growing faster, though, is the need for key battery metals like lithium and nickel.

And then there are the smaller, but still important, cobalt and REE markets.

This is all great news for mining companies and mining investors. We’re seeing a new boom unfold in Australia and around the world as these minerals continue to dominate demand.

Long term , one has to wonder if this net-zero push will all be for nought.

Like other trends we’ve seen, it carries a worrying lack of foresight and planning…fundamental necessities that could end up exposing the market and projects like this offshore wind farm to cost and feasibility issues.

If that happens, we’ll all have to ask ourselves how we plan to keep the lights on…

Gas seems like the obvious answer right now, but that could change. I certainly wouldn’t bet against fossil fuels though, because as unloved as they are by politicians, they’re consistent.

https://www.moneymorning.com.au/20230713/the-dilemma-of-the-critical-minerals-boom.html

Twitter rival Threads launched to much fanfare last week.

But has Threads adoption hurt Twitter?

According to data collated by Sensor Tower, Twitter’s active users remained steady over the past week, with ‘no signs of slippage since the Threads launch.’

Which brings me to a question we posed last week.

a) Will Threads be to Twitter what Google was to Yahoo?

b) Will Threads be to Twitter what Windows Phone was to Apple's iPhone?

c) Will Threads be to Twitter what … Instagram is to Twitter? #ThreadsApp $AAPL $GOOGL $MSFT $META

— Fat Tail Daily (@FatTailDaily) July 6, 2023

If Twitter continues to retain its active users despite Threads, then it looks like Option (c) and (b) are in play, with me leaning towards (c).

 

Domino’s topped the charts for the most negative revisions according to Macquarie, reported AFR’s Joanne Tran.

Others included plasma collector CSL, diversified miner South32, and retailer Harvey Norman.

 

David Foster Wallace once mused whether fellow novelist John Updike ever had one unpublished thought.

Does economist Larry Summers ever have one unquoted opinion?

Today, the Australian Financial Review obligingly gave its megaphone to Summers, who eagerly proclaimed after the latest US CPI print:

“The best guess is that the Fed is going to have to raise rates more. If the Fed wants to see inflation get back to its target, it’s going to have to raise rates enough that at some point, the economy suffers.”

West Australian lithium developer Global Lithium Resources [ASX:GL1] made a rare earth element (REE) discovery adjacent to its Manna Lithium Project in WA.

GL1 has already christened it the Cardunia Rocks REE Project.

Source: Global Lithium

The market’s reaction was muted. GL1 shares are currently down ~1.45%.

The lack of excitement may relate to a question of capital allocation. Global Lithium isn’t generating any cash yet. So spending its money wisely is vital. GL1 doesn’t want to fight a capital-intensive battle on two fronts if the payoff isn’t worth it.

Is the establishment of a separate REE project a signal of GL1’s ambitions or a veiled admission the Manna Lithium Project may not be enough?

Touching on that issue, Global Lithium exploration manager Logan Barber said:

‘While Global Lithium remains focussed on increasing its lithium resource base and working towards the finalisation of a DFS for the Manna Lithium Project, the company is well resourced and has the relevant expertise to take advantage of other value accretive exploration opportunities such as this. The experienced geological team is well supported to execute the previously announced 50,000m drilling campaign at the Manna Lithium Project and to concurrently investigate the upside potential of the emerging bedrock Cardunia Rocks REE mineralised system.’

Luxury retailer Cettire [ASX:CTT] is up 6% in early trade on Thursday, pushing it to a new 52-week high.

What is going on with this stock?

Bucking the wider consumer discretionary trend, Cettire is up nearly 200% year to date and 800% in the last 12 months.

Wild, given the circumstances.

The stock is still down ~15% from its all time high of $4.32 a share, having crashed to 36 cents in June last year.

Is this a rally led by bargain hunters who thought the stock was grossly oversold in 2022?

Netwealth is up over 6% on Thursday morning after funds under administration (FUA) rose $4.4 billion to $70.3 billion for the June quarter, comprising $3.2 billion of net inflows and a positive market appreciation of $1.2 billion.

Funds under management (FUM) rose $600 million to $16 billion in the June quarter, with FUM new inflows of $400 million.

However, Netwealth did say quarterly outflows ‘have continued at elevated levels’. The reason:

‘Clients partially withdrawing funds to invest in off-platform investments including term deposits and other alternative investments, and large partial withdrawals for high net worth and large accounts.

‘Despite strong inflows during the quarter, the prevailing economic uncertainty and its impact on investor sentiment have resulted in delays in committed transitions and new business activities for our existing clients. Moreover, the current market conditions have continued to make it challenging to estimate timing of these transitions on a monthly or quarterly basis.’

Cash is no longer trash … but a competitor!

The ASX 200 opened 1.15% higher on Thursday, seemingly bolstered by the news over in the US.

The morning’s biggest movers:

• Perseus Mining [ASX:PRU], up 8.2%
• Virgin Money [ASX:VUK], up 8%
• West African Resources [ASX:WAF], up 6.3%
• Evolution Mining [ASX:EVN], up 6.2%
• Netwealth [ASX:NWL], up 6%

 

 

And here’s Stephen Williamson, reviving the Team Transitory message:

‘Maybe the initial notion that the surge in inflation was transitory was the correct one — it was just a more persistent transitoriness than first envisaged.”

1/Most of this is pretty good. I especially like the part about why we can have inverted yield curves. You could add the following. Maybe the initial notion that the surge in inflation was transitory… https://t.co/5c6ZQD8akR

— Stephen Williamson (@1954swilliamson) July 12, 2023

 

 

It doesn’t end!

Here’s more discussion about the sacrifice ratio thought to be needed to fight inflation.

Lael Brainard, director of the National Economic Council of the United States, delivered a speech yesterday and echoed Krugman’s query about the absence of any sacrifice sustained by the US economy despite fast-rising interest rates.

On the back of a good inflation report, NEC Director Lael Brainard takes a shot at economists who have argued the sacrifice ratio would need to rise

From her speech today:

"The economy is defying predictions that inflation would not fall absent significant job destruction." pic.twitter.com/ozOCWVOim8

— Nick Timiraos (@NickTimiraos) July 12, 2023

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And here’s Paul Krugman musing whether the ‘inflation is transitory’ thesis got some vindication from yesterday’s CPI numbers.

Gotta say it: the original Team Transitory proposition was that inflation would subside without the need for a big rise in unemployment. Not looking so wrong now (supercore is core ex used cars and shelter, 6m annualized) 1/ pic.twitter.com/ma2pQdtm2i

— Paul Krugman (@paulkrugman) July 12, 2023

Krugman noted that the US economy did not face a painful ‘sacrifice ratio’ despite hiking rates at a historic pace.

In economics parlance, a sacrifice ratio is the percentage of a year’s real GDP or unemployment foregone to reduce inflation by 1%.

Usually, reducing inflation by 1% requires about 2.5% of unemployment, according to my copy of Mankiw’s Macroeconomics.

Yet the US is not reeling from steep unemployment (at least, not now) … hence the Krugman tweet.

Here are some quick takes from some top economists around the world on the latest US inflation data.

Justin Wolfers took the cheekier road, quipping that greed appears to be transitory (a reference to the debate about greedflation).

pic.twitter.com/QXMQnBQhFM

— Justin Wolfers (@JustinWolfers) July 12, 2023

Morning!

Here’s a quick summary of what made the news overnight.

The biggest news was from the US.

Headline inflation rose 0.2% in June and 3% over the last 12 months, down from 4% year-on-year in May. Consensus forecasts expected 3.1%. That’s the lowest inflation level in over two years. However, core CPI — excluding food and energy — rose 4.8% over the last 12 months, down from 5.3% in May.

Not quite as good…

Overnight, the major US stock indices closed at 15-month highs and the two-year Treasury yield fell to a two-week low of 4.72%.

Locally, the Reserve Bank governor Philip Lowe — whose contract may or may not be renewed — gave a speech yesterday and fielded some questions.

He reiterated that inflation is the bank’s priority but also said they haven’t moved to raise rates as quickly as other central banks. That was by design and for several reasons:

1. Australia’s wages growth is slower than most other advanced economies.
2. Labour supply in Australia is a lot more flexible than elsewhere.
3. And Lowe said the RBA is taking a slightly different approach to curbing inflation by deliberately going a bit slower to preserve gains in the labour market.