The heat is on now. US stocks took a sharp drop overnight. Aussie stocks foreshadowed this yesterday.
I sent a note to a few of my trader colleagues after the market closed to point out some atypical weakness across the small-cap sector.
We might be getting our first big stress test of the general bullishness in the market in the last few months.
It’s easy to pin it on the US election, but you can never be 100% certain of anything in the market.
For example, bank updates are due soon here in Australia. These will be important.
Westpac Banking Corp [ASX:WBC] came out yesterday and said its second half results would be off by $1.2 billion.
The market expected this. But it’s worth noting down the date and the announcement on a chart of the stock. It gives you a reference point to analyse future price action.
You could make a case, as my colleague Greg Canavan does, that the banks are the one big sector to offer considerable value and upside in the market right now.
I’m still worried about the bigger structural shift away from traditional banking and the arrival of central bank digital currencies.
This is important for everyone in the world but a vital trend for Australians. That’s because so much of our market value stems from the Big Four banks.
It also places the typical retiree in a very difficult position. The banks were a default income play that carried, in the past, little reason for constant concern.
That’s not true now, and I’m not sure it ever will be again. That’s a dilemma for a lot of people.
I read on the weekend about a retired couple that have lost a huge chunk of their income because of the deferred bank dividends and decline in term deposit rates. They said they were now going backwards.
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Is this the End of Passive Income?
All is not lost. There are still income plays out there on the ASX.
One of the quirks of the current market is you can acquire these with a lot of the potential downside already knocked out of them. The crash in March has done a lot of the work there.
I’ve never loved the idea of buying a stock for the dividend alone because of the risk to capital.
Just look at anyone who bought the banks before COVID came along with the same idea.
But the alternative is to try and go for capital gains and sell parcels for income along the way. That’s not so easy at the best of times, let alone in this market, especially for those with little interest or experience.
My colleague Catherine Cashmore says you can expect this situation to get worse. It’s highly likely that the RBA sends interest rates into negative territory in the near future.
It’s also possible we’re penalised for holding cash. The trend towards this could become very acute if the current recession gets worse. Governments have to get people spending to keep the system whole.
Why is that? Because the whole shebang is built on debt, most of it private and unproductive.
Debtors cannot be allowed to default en masse. It would crash the economy in the extreme if so. Hence why governments and central banks are so proactive now.
It’s easy to take this for granted in this day and age. But in the early years of industrial capitalism, the academics and bureaucrats of the day did not believe governments should interfere. They saw themselves as something like night watchmen.
The Great Depression changed that. Part of the economic Keynesian Revolution was legitimatising government encroachment into the private sector.
Bigger debts have been building ever since because none of it addressed the key problem in the first place: that money is brought into existence as a debt. And what that debt is used for is vital.
Here in Australia, like most of the West, that debt is used to acquire property, most of which is not productive, in an economic sense.
That leaves a heavy burden over the economy. It also means higher interest rates can kill off any economic recovery in a heartbeat. They must be pinned down to prevent this from happening.
There is no natural law that the monetary system has to be run this way. But that’s the one we have.
It’s a future of negative interest rates, no cash, and central bank currencies. Liberty and privacy are diminished in this world. It’s coercive and dangerous to personal freedom. No-interest income is not the only problem. It’s just the first.
Best wishes,
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Callum Newman,
Editor, The Daily Reckoning Australia
PS: I reveal the unexpected impact of the lockdown I see on the property market — where real estate prices could take a short-term hit before quickly rising to new heights. Click here to learn more.
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