Are You Ready For The Boom?
7th of September, 2021
The world is an unfair place with a chasm existing between the haves and have nots.
Those with money and those without.
Those with opportunity and those without.
For centuries there has been disparity between the haves and have nots and this differential still exists today.
Currently in stock markets all around the world we are seeing an abyss between companies that are awash with cash and those that are not. It’s like the markets are mirroring real life.
Some sectors and companies are swimming in cash reporting record earnings and bumper dividends. According to AMP Capital, more than 90 per cent of companies have raised or maintained their dividends from a year ago.
It’s been estimated that dividends and buyback cheques totalling nearly 5% of Australia GDP will be hitting the “Have’s” bank accounts this quarter.
You read that correctly $86.6 billion cash!
There are plenty of companies flush with money looking to make BIG distributions like Wesfarmers who will bestow investors with a tax-effective cash bomb of $2.3B…
While the poor cousins like Flight Centre are burning $30-$40M dollars a month and Qantas reported losing $2.35B in what CEO Alan Joyce described as diabolical trading conditions.
However, like those active in the property market anyone with money is boisterously bidding up prices to exuberant levels.
The M&A (Merger and Acquisition) activity is really starting to party with almost $200B worth of deals having already been completed this year in Australia.
Cheap and plentiful money is starting to make an impact upon the markets as the second half of the Investment cycle starts to take shape.
Large amounts of cash are a function of the second half of the cycle. History tells us that the pause that punctuates the division between the first and second half of the cycle should not be credit related.
This time the intermission was brought about by Covid as world economies coughed and spluttered, eventually calling in sick to work.
During this time markets crashed and offices sat empty as the world wondered what to expect next.
The spasmodic opening and closing of borders and lock downs sent global supply routes into chaos.
Covid numbers skyrocketed and deaths increased as the world was paralysed with fear.
Then the “Ever Given” choked Egypt’s Suez Canal creating further trade turmoil.
If you want to hear more about the historic impact canals have had then check out our PAFO Podcast Episode #22 Dr Sal Mercogliano – Connecting the World
Could things get any worse?
The thing with all of this is none of it was credit related. In fact, with interest rates around historical lows it’s almost the opposite and this is not just in Australia – it’s a worldwide phenomenon.
Like mid-cycle pauses before it, real estate prices stayed buoyant and the crash that many predicted just didn’t occur. AMP forecasted -15%, CBA -10% and ANZ -9% none of which of course eventuated.
Those with time and those without.
Those who are literate and those who aren’t
In Australia the Reserve Bank instigated the tried-and-true reaction of slashing official interest rates and pumping billions into the economy to ensure the banking system didn’t suffer the same fate of 2008/09.
Then the Federal Government dropped the banks “Responsible Lending Requirements” and the Banks response was to increase lending, driving profits sky high.
Now we are in the situation where CBA is giving away huge amounts of cash – a $10B cash injection in the form of dividends and buybacks.
This is on top of its tier 1 (CET1) capital ratio rising to about 13.1% – 260 basis points or 25% higher than the regulator’s required benchmark of 10.5%.
Heightened market liquidity, massive corporate cash reserves, liberal bank lending standards and private equity firms with bullet-proof self-confidence are creating an environment that those who have studied the history of stock markets have been expecting.
As always the nay-sayers are still worried. Worried about covid, supply issues, employment opportunities, the acceptance of the growth in speculative attitudes, sustainability of corporate profits and I’ve yet to utter that 5 letter word… CHINA.
As we enter the early stages of the second half of the cycle, credit is flowing more and more liberally as history tells us it should.
Always remember the biggest booms occur when the most amount of credit is created.
Real estate? Private equity? Mergers and Acquisitions? Healthcare? Technology? Gold? Precious Metals? Crypto currencies? Where will the credit really flow?
America? Russia? Brazil? England? Which flag will be raised the highest on borrowed funds?
These are the questions that we will need to answer by observing the investment environment around us.
If you need some convincing as to the level of credit activity, below is a chart of finance commitments broken down into owner occupiers, investors and first homeowners. What this clearly shows is that the investors are back on the move. This is a sector that has been in retreat for many years, but appetite from them and the lenders has changed.
Watch this space is all I will say about it…
It is my belief that we should view the world and all its economic and investment activities through the Calnan Flack Economic Cycle Action Plan. This provides us with a frame of reference to interpret current events.
Those with savings and those without.
Those with super-fast internet and those without.
The Calnan Flack Economic Cycle Action Plan is telling us that we are heading into the time in the cycle where credit expansion can be expected. If history is to repeat credit expansion has the potential to flow into asset price speculation pushing prices even higher.
Which brings me back to my original point between the “Haves” and the “Have nots”.
Technology is changing our economy. This is the time for the new economy to shine – to bask in the sun so to speak. It will not be without price volatility, nor without disruption. It will create losing and winning business models. This is a mega wave, a tsunami, that will have long and lasting effects on not just your investments but also how we live our lives.
There are many companies that have business models leveraged towards the new economy. Some more mature businesses have embraced technology and innovation with segments of their business to modernise and ensure they stay relevant.
However, there are those that will struggle, battling to keep pace with the rate at which competitors and emerging new sectors of the economy slice into their market share.
Remember we are now in the second half of this cycle which is shaping up to be a ripper – so lets make sure we join the “haves”!