Friday, 1 December 2023 — Melbourne, Australia

By Kiryll Prakapenka Editor, Fat Tail Daily

[4 min read]

Dear Reader,

Shirt tucked. Best jacket on. Notes printed. Pen at the ready.

I’m tense.

I’m about to interview the ‘most positive man in finance’.

My assignment is to grill him.

Positivity cannot go unquestioned!

Fidgeting in my seat, I run through the talking points.

‘On a real, per capita basis, Aussie retail sales are down over 4%. Does that concern you? ’

‘What about the macroeconomic headwinds?’

‘How can earnings rise in a higher for longer environment?’

‘What about the equity risk premium?’

And Callum Newman, special guest on this week’s episode of What’s Not Priced In, had a ready answer each time.

As for the equity risk premium, he was blunt.

‘Frankly, I don’t give a toss.’

In this fun episode, I grill our small-caps expert Callum about his optimistic outlook for Aussie small caps. Topics discussed: 

• Why Greg called Callum the 'most positive man in finance' 
• Why Callum thinks 'all the ingredients are there for the Aussie stock market to start firing on all cylinders'
• How macroeconomic conditions inform (or don't inform) Callum's thinking
• Strength of iron ore price and why Callum remains bullish 
• Lessons from the lithium hype cycle 
• Why Callum 'does not give a toss' about the slim equity risk premium 
• Principles of sound small caps investing: focus on businesses growing faster than wider economy 
• 'Astonishing value' in the small-cap sector as market continues to misprice solid, profitable businesses 
• Callum's watchlist: Mount Gibson Iron [ASX:MGX], GQG Partners [ASX:GQG], Maas Group [ASX:MGH], and Resimac [ASX:RMC]
• Is the generative AI hype warranted and is there any AI ideas on the ASX?

Tale of two updates

Optimism versus pessimism.

Two trading updates offer a nice illustration of the conflict.

One from retail giant Harvey Norman [ASX:HVN]. And one from online furniture retailer Temple & Webster [ASX:TPW].

Let’s turn to Harvey Norman first.

Between 1 July and 25 November, Harvey Norman’s total sales fell 7.8%.

Comparable sales were down 8.7%.

But the retailer’s Australian segment fared worst.

Harvey Norman’s franchisees saw comparable sales fall 11.9%!

Pessimists vindicated!

Harvey Norman’s flagging sales jive with recent retail turnover data from the ABS.

Retail sales came in softer than expected in October, falling 0.2% against an expected 0.2% gain.

Annual sales growth is an anaemic 1.2%.

When you factor in population growth and retail price inflation, sales are down about 4.5% on a real, per capita basis.

That doesn’t sound positive.

Temple of Boom

But then we had the trading update from Temple & Webster.

In the same stretch between July and November, the online furniture retailer saw sales rise 23% year-on-year.

Sales even accelerated between October and November, up 42% YoY.

Management proudly said the firm continues to grow market share ‘at a time when the overall furniture and homewares market is down’.

The company also reaffirmed its EBITDA margin guidance for FY24.

Temple & Webster is up 30% this week.

Chasing secular growth

But what do the two contrasting sales updates reveal? What is the takeaway?

First, let’s digress by mentioning the market’s reaction to Harvey Norman’s trading update.

The stock went up.

Harvey Norman rose over 4% following the announcement.

That suggests slumping sales were largely priced in. The market is discounting current soft consumer demand and looking ahead.

Exactly how far ahead is something I discuss with Callum.

That’s the thing with markets.

The macroeconomic situation today can be justifiably gloomy. But if the market has already accepted it, what matters is the market’s view of tomorrow.

But back to the original question. What’s the message behind the tale of the two updates?

It’s not a stock market, but a market of stocks.

I’m sure you’ve heard Greg say this that on the pod before.

Or as Callum wrote recently, ‘there is always opportunity, every year, even if the averages don’t show it.’

The key is to focus on growing businesses who don’t give a hoot about real per capita sales declines.

Harvey Norman is a mature company with a big presence. Its size means it now grows more or less in line with the wider economy.

If the economy slows, so too will Harvey Norman’s sales.

But there’s always businesses who are growing faster than the aggregate economy.

I cited research from Morales and Kacher a while back:

‘[Winning stocks] represent the leading edge of what is happening in the economy with respect to the new industries, new economic developments, and other themes that serve as essential drivers for the economy at any given point in time.’

Temple & Webster is benefiting from the secular growth of consumers shifting traditionally offline purchases online.

The company is also trying to benefit from the AI craze.

This week our venerable Macquarie Dictionary announced its People’s Choice Word of the Year winner was generative AI.

It’s a winner in the corporate world, too.

Temple & Webster thinks it’s ‘well-placed to benefit from … the revolutionary potential of new technologies such as generative AI’.

I doubt if ChatGPT can help a furniture retailer bring fixed costs down ‘materially’.

But the point is this.

There’re always businesses beavering away at the frontiers of the economy. And at the frontier, wider macro concerns rarely matter.

In Callum’s parlance: they don’t give a toss.

Enjoy the episode!

Regards,

Kiryll Prakapenka,
Editor, Fat Tail Daily

PS: Leave a comment or question you’d like us to address on the pod. Either leave a YouTube comment or email us at wnpi@fattail.com.au

By Bill Bonner Editor, Fat Tail Daily

[4 min read]

Dear Reader,

What a lousy way to thank me
After how I've tried
Ah, don't you think I've got a right to cry

~ Marty Robbins

Nowt comes from nowt.

Every person on the planet has a mother and a father. And every thing had some other thing come before it, opening the door for it and making introductions. So it comes to be that when a generation of Americans got something for nothing, the next generation got nothing for something. It must pay $1 trillion-a-year just to keep up with the interest on the things their parents and grandparents consumed.

The young are getting tired of being ripped off. They are beginning to revolt. That may be the real meaning of Milei’s victory in Argentina. Milei ‘came out of nowhere’ to clinch the top job, running against one of the savviest, slickest, most professional politicians in Argentine history — Sergio Massa. Stephen Kinzer, writing in the Boston Globe:

The victory of Javier Milei, until recently a little-known economist who had served only a single term in Congress, is a symptom of global anger at sclerotic political elites. For decades, Argentina has been run by a corrupt and self-interested clique that has failed to provide the nation’s citizens with security or prosperity. This month’s election was a rebellion against that elite, which Milei calls ‘the caste.’

Milei’s victory is no aberration. Opposition candidates have won 17 of the 18 elections held in Latin America over the last four years. That same impulse is palpable in the United States. This is a main reason Donald Trump defeated Hillary Clinton in 2016, and why he may win again next year. When an entrenched political class runs out of energy and loses voter confidence, more people adopt a ‘throw the bums out’ attitude.

The Political Caste

Argentina has no real immigration problem. Its problems are financial. The ‘political caste’ has spent too much money and fouled the economy.  

The US follows along.

Today’s dollar is worth only about 55 cents, compared to a dollar in 1999.  

Some ordinary people have kept up with it. Many have fallen behind. But for all people working for wages, it has been a struggle. A lousy way to thank them all.

‘Inflation,’ though difficult to explain or control, is the price we pay for letting a corrupt and dissolute elite tell us what to do. They told us we should invade Iraq…fight in Afghanistan…support conflicts all around the edges of the empire…and boost the economy by printing money to increase ‘demand.’ Of course, the new demand was as phoney as the fake money and the fake interest rates. But it had its effect; more money bought more things…now rusting, collecting dust, used up and derelict.  The new money also increased prices for the assets that the deciders owned…and for the products that the non-deciders now want to buy.

The things we needed to buy with money we didn’t have can be put into three categories — the absurd, the useless, and the dangerous. Sanctions…trade restrictions…subsidies to selected industries…trillions for extra ‘defense’ …diversity programs…sex change operations (even in the military)…we needed to fight drugs, poverty, global warming, urban decay, misinformation, infection, white supremacy and anti-semitism. We needed to do this…we needed to do that…to find those ‘weapons of mass destruction’…or to shut down the economy for ‘two weeks to stop the spread’…and everything had a price tag.

Mo’ Money

Between 1999 and 2023, the Fed ‘printed’ nearly $8.5 trillion in new money to pay for these things. That, along with borrowing from private sources brought US debt to $33.7 trillion today.  

Growth rates sagged. Most people didn’t get richer…they got poorer. They sank deeper and deeper into a sea of debt — public and private….with interest rates rising to 21% on credit cards and 4.4% on the best credits in the world — US Treasury bonds.

Is it any wonder that the masses — especially the young — are in revolt? Dragging the burden of the past…how will they ever afford a proper future? They are among the malleable millions…the multitudes who pay taxes, count themselves lucky to have a pay check and don’t ask too many questions. And now, they may go through their entire lives trying to pay for the things that only exist in hollowed out husks and discredited slogans...things their parents thought were necessary, but were unwilling to pay for. Haven’t they got the right to burn a bus or two?

Already, the cost of the interest on the US debt comes to about $10,000 per family per year. Soon, the debt will pass $40 trillion…and then $50 trillion (there is no plan to cut it back). Extra borrowing will have to be met with higher interest rates and more money printing. At 8% interest, and $50 trillion outstanding, the interest charge will come to about $3 trillion per year (it is not all refinanced at once). That will be $30,000 per family.

Revolt of the Masses

There will be no question of paying it or even keeping up with it. Then, we will be with the gauchos…with collapsing public services…wallpaper money…galloping poverty…and voters ready for a change.

We are seeing the cutting edge of this ‘revolt of the masses’…where else — in Argentina, itself. Javier Milei is unlike Donald Trump, in that he actually has ideas about how an economy works and real plans for how to rescue it from 70 years of crony mismanagement.  

Normally, Milei would be as unelectable…well…as Trump himself. He used to teach tantric sex. We’re not sure what that is, but it sounds like it might be fun. He also believes his dead dog told him that he would become president.

He is not a mainstream politician, but a ‘marginal’ one. And now, there he is in Argentina’s highest office.

Does the US have its own Milei…stalking the 2024 election? Maybe.

Stay tuned…

Regards,

Bill Bonner,
For Fat Tail Daily