My apologies for my absence in communicating with you. My last post was on November 23. My main themes were that we were entering the early stages of a very mild global recession or just weak economic activity that would not trigger the emergency interest rate cuts that the middle-income population so desperately wants. My view was that we should prepare for a higher-for-longer interest rate cycle due to the tug-of-war between slow local economic growth and stubbornly high inflation.
While weaker economic activity was reported in the December 23 quarter at just 0.2%, there are some big conflicts to resolve before we can begin an interest rate-cutting cycle. Firstly, employment is still very stable, with unemployment at 3.8%, despite the 730k immigrants arriving last year. We will need to see unemployment well into the 4.0%–4.5% range. 2
Secondly, we need to see a taming of wage growth. Last quarter, we reported wage growth of 0.9% and annual growth of 4.2%, the highest quarterly report in 14 years. It is hard to see this slowing back to the long-term average of 2%. Just last month, the government raised the minimum wage by a whopping 8.6%. Now, I certainly don’t begrudge this cohort a wage rise, but it would be naive to think that this doesn’t flow through the economy in the coming months with higher prices.
This leads to the next reason why interest rate cuts are unlikely this year. Inflation is still above the magic 2-3% band. The latest quarter, March 24, printed 3.6%. We will need to see mid-to-low 2’s to see a modest easing of interest rates.
So, now that I have given you an update, what does this mean for you? It means you should buckle in for higher, longer rates.
I may even suggest that we are seeing a reacceleration of growth in the global economy, led by the USA with its massive fiscal stimulus. Locally, the state governments of Australia are doing the same with large fiscal spending on infrastructure. So, understand that there are no interest rate cuts in 2024 (without a global financial crisis or world war). I put this at less than a 10% chance).
I certainly don’t recommend leveraging up on any asset at this point in the cycle. It’s not the time to upgrade homes, do renovations, or buy investment properties. Instead, you should be de-leveraging and existing assets that are not returning a 6% compound return. Remember, every dollar that you retire from personal debt is giving you a gross risk-free return of circa 9% (for top marginal taxpayers). The smartest and savviest will be those that build equity in their own financial position in these times of higher-for-longer interest rates.
So, am I practicing what I preach? Indeed, I am. My wife and I downsized our family home this month and retired from debt. I have been actively selling stale assets that are not performing, and we have refrained from a Euro holiday this year. I have limited personal investments and instead bolstered our Superfund, making it our primary investment vehicle. It is an interesting psychology that we tend to be far more patient with superfund investments vs personal investments.
Hey, talking about Superfunds, don’t miss out on making your catch-up contributions from 2018-19. The ATO will allow you to catch up on any shortfall from your actual contribution to your maximum cap of $27,500. Better still, you can claim the catch-up contribution as a deduction in your 2024 tax return. If you need help with this strategy, be sure to reach out to your preferred advisor/accountant or send me a message, and I will be glad to provide some guidance.
Back to investing, I have been writing here since as early as September 2022 that you should own some Bitcoin. You will recall that the ideal risk weighting, in my view, is a 5% allocation. Back then, Bitcoin was trading at around 20k USD, and it’s now back to its highs of 65k USD. On a balanced portfolio, that would have added 15%+ performance to your portfolio. I remain overweight on Bitcoin/Crypto. I am not a seller at current levels. In fact, I remain a bull in this asset class. My primary view is that globally, fiat money is structurally broken. The global central banks and governments are hooked on money issuance, and we are in the early stages of global monetary debasement. If you’re looking for what monetary debasement looks like, think Argentine Peso, Venezuelan Bolivar, Turkish Lira. Or, if you’re thinking, “Yeah, these 3rd world emerging countries make sense,” but then take a look at the Japanese Yen, which has depreciated by close to 50% in the last 20 years.
If the US were to catch this theme, where do you go to hold your wealth when measured globally? Gold is the obvious choice, and its appreciation in the last 4 months is telling (gold should not be rising with rising bond yields).
Real property is a worthwhile asset, but it is ring-fenced domestically, and it’s not easy to acquire property outside your native country. Commodities make sense as these are real assets, and your portfolio should have some exposure to this asset class. Of course, we then have the new-age gold of Bitcoin, and at some point in time, you may well see a central bank take a position. When that becomes publicly known, then Bitcoin just goes higher, a lot higher.
With inflation looking structurally higher for longer, I am increasing my allocation to the energy sector. I have a strong belief that the ONLY solution to global energy needs with low carbon emissions is nuclear. These types of allocations are long-term, and by that, I mean a 10-year time horizon. My initial allocation is the ETF known as VanEck Uranium and Nuclear ETF. I will be allocating 2%, but I am on the lookout for businesses that will serve this industry and have a goal to get to 5% for this sector.
Imricor is one of our other holdings, as well as my single largest individual share holding. It is treading water at around 0.50 °C. I believe that the next 6 months will prove to be a turning point for this company, which has a 10-20x upside over the next 5 years. Tactically, I have added the ASX-listed company Dubber at 6c. There is a story around its recent share price fall involving the CEO and company fraud of $25 million. This has now been resolved and recapitalized, and it’s back to business as usual. It would not surprise me to see this trading back to 12–14c by year-end.
On broader asset allocations, we are underweight on property but on the watch for further allocation. We are overweight on credit, primarily investing in 1st mortgage metro residential property with terms of 6-18 months, a maximum LVR of 65%, and preferably quarterly income. We have been investing at net yields of 8.5%. We remain neutral on Australian and International Shares and neutral on fixed income, although this recent pop in bond yields will again present an opportunity for above-average fixed returns.
In the coming weeks and months, I will be doing a “meet the manager” note. This is not a deep-dive research note. Instead, it is my interaction with the manager of the business we have invested in. The idea is to give you a short, succinct update on the investment and my view.
Look out for these in the coming weeks and months!
Missing in Action