Dear Reader,

One of the most difficult things about investing in the age of socialist central bankers is to learn to be flexible. What looks probable one day becomes improbable the next.

As a result, having hard and fast views can be detrimental to your wealth. While you need conviction, to paraphrase Keynes, you also need to change your mind when the facts change.

So, the following thoughts are subject to review, should our central planning overlords decide to meddle further.

Yesterday, I pointed out how Chinese currency devaluation could spell trouble for Aussie commodities. The last time it happened, in 2015, the ASX 200 resources index fell 35% in the months following the devaluation.

The best commodity proxy stock, BHP Group Ltd [ASX:BHP] is starting to show signs of a change in trend. The chart below shows a sharp share price fall for BHP over the past month, resulting in the moving averages crossing to the downside.

The share price is bouncing right now. But unless China comes out with a stimulus package soon, or the trade war resolves itself (highly unlikely in my view), then I’m tipping there are more falls in store for BHP.

Looking at a few economically sensitive commodities, the picture isn’t inspiring either. Copper prices are on the brink of a major support level. If this support breaks, you could be looking at significant further falls…

Oil prices are also trending lower…

And don’t forget, iron ore prices have fallen from US$120/tonne to around US$85/tonne in a month.

In short, the environment for commodities is turning bearish. That means you should think about shifting capital out of this sector.

But to where?

Well, there is one part of the economy that is picking up again after a few years of weakness — housing. From yesterday’s Financial Review:

‘Residential property sales in Sydney and Melbourne are rebounding to near boom-time peaks as buyers respond to record-low interest rates and cast aside concerns about a sluggish economy.

‘Sydney recorded a preliminary auction clearance rate of 80 per cent on Saturday and in Melbourne 76 per cent of properties sold under the hammer, in line with sale results recorded during the five-year housing boom that topped out in mid-2017.’

Clearly, two interest rate cuts this year, continued strong immigration, a slowdown in housing construction and a loosening of lending restrictions have all provided a boost for the housing market.

This makes today’s RBA decision all the more interesting.

I’ll come to that in a moment. But from an investment perspective, housing related stocks may offer better performance relative to commodities right now.

But the truth is that this sector, along with quality retailers tied to housing, have already had a good run. For example, Harvey Norman Holdings Ltd [ASX:HVN] (which I recommended to my subscribers earlier this year) is already up 45% from the lows reached late last year.

This is a tricky market. There is a battle between bulls and bears. Commodities are coming off the boil. Falling interest rates have inflated many asset prices beyond reasonable value.

In this type of market, the focus should be on stock picking. That is, finding individual stock stories that have something going for them.

The time for ‘thematic’ investing is all but out. The only theme really working now is gold. But even then, the large-cap gold stocks are on the expensive side. You need to look closely for opportunity and value.

I guess you could say the interest rate theme is working too. That is, any stock with reasonably reliable earnings and a decent dividend yield is up strongly, on falling interest rates and government bond yields.

But earnings are ultimately derived from economic growth. We get a look (albeit a backward one) at just how strong economic growth is in Australia this week, with the release of second quarter GDP numbers on Wednesday.

The expectation is that the numbers will show very weak growth indeed. The market isn’t too fussed about that though. Its tipping low interest rates (and income tax cuts) will support the earnings of domestic focused stocks.

On the other hand, low interest rates do nothing for the resource sector. 

My guess is that the RBA will keep rates on hold today. Another cut may do more harm than good. People may wonder just how bad the economy is if the RBA cuts again.

Sadly, I don’t think the RBA is too concerned about blowing another housing bubble. That’s never been a primary concern. The risks to short-term growth (and damn the long-term consequences) has always been their modus operandi.

They simply don’t care about the long-term implications of ever increasing debt. Someone else will be in charge by the time those chickens come home to roost.

More to the point, they are blind to the fact that we are now suffering the long-term consequences of monetary policy decisions made years ago. That is, our economy is ever more reliant on housing debt and consumption.

This will become increasingly obvious should falling commodity prices put pressure on Australia’s national income growth.

Australia can handle a weak commodity sector if housing is strong. And it can handle falling house prices if commodities are strong.

But it can’t handle both. So if a resources bear market does eventuate, expect interest rates to keep falling, and house prices to keep on rising.  

Regards,

Greg Canavan, Editor, The Rum Rebellion

Something's Got to Give
By Harry Dent

A wise man once said that if you need to take viagra to have sex, you should know you have a low libido.

And if you need to pop a second pill, then you're dead down there.

That's how I feel about the global economy at the moment.

Even after the aggressive tax cuts, we're slowing again back to that dreaded 2% GDP growth already. And all the flashing lights are indicating that we're heading for even more into early 2020.

Look around: Germany is falling into a recession in this quarter. Italy's already there. The retail and financial sectors have been underperforming for over a year. Home construction peaked two years ago. RV sales have come crashing down. And we're at a critical point in the stock markets, created by falling bond yields, a weak economy.

We're in the dead zone, with massive government stimulus and still more planned. Trump is already talking about payroll tax cuts. That's the one thing they haven't done yet.

Something's got to give. We'll either break out of this sideways range in the last month to the past highs of July, or plummet down to the lows of early June. If those two levels are broken, then we see that 20%–25% final rally, or first, a 20%-plus correction.

I'm afraid to hold my breath. There will be clearer signals soon.

Regards,

Harry Dent, For The Rum Rebellion