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Recovery here – Politicians in denial

We are having the sharpest economic cycle in at least a generation. There has been recovery and with it price increases, not just in Australia, but across other Western Nations. Company inventories have fallen to record lows, and across the country will are experiencing shortfalls and price rises in lumber, building materials and commodities. Additionally, we are seeing our first evidence of wage inflation with job advertisements for diesel mechanics in Perth for $200,000 per year! I have it on good authority that various companies have people waiting at Perth airport offering workers $10,000 just to agree to negotiate to change jobs.

We are seeing a tremendously strong listed company profit cycle with profits up 35% this financial year- the strongest company profit cycle since 1983!
The RBA are buying bonds and bond rates are being suppressed to artificially lows. The reality is that Inflation is probably already at around 3% conservatively and more than likely higher than that. This makes us think that Bonds yields (income you get from Bonds) should be around there as well – but they are not. The result is that It may not be enough to kill equity markets but it certainly will make a dent. We have already see Afterpay fall 47% from its highs this year and other tech stocks getting hammered down.

The supply chains will catch up in about a year or so, however we don’t believe we will see inflation pull back at that time because the Politicians are continuing to add fuel to the fire through financial stimulus. In the past, governments would have stepped back from the stimulus but not now. It’s still ongoing, because people are voting for it.

Job Keeper – first month after the end of Job Keeper and the unemployment rate is down another 20bps. There was no “fiscal cliff” following the end of Job Keeper. Saying that, we now have Job Keeper 2 being rolled out for Cities that go into lockdown.

Overseas, President Biden is spending money like there’s no tomorrow. His $1.9 trillion spend makes the “New Deal” which was fathered by President Roosevelt (FDR) in 1933, look pale.

We believe the US economy is going to be strong in the near term off the back of it.  We expect US rates to move up later this year and we believe this will be a quicker rise than most people anticipate. And when that happens the rates in Australia must rise. Remember we get 70% of our finance from the US. We think people will be in for a surprise and rates may move up faster than people expect or what we are led to believe by the Reserve Bank.

Then there is geo-political risk – in this case, China . China is not in a position to invade Taiwan for example. Going across an ocean and invading another country without having a base there is risky business – militarily.

At the moment, China has three aircraft carriers, one is an old hand me down from the Soviet Union, and two are small carriers that carry about 20 planes. Sure they are building aircraft carriers at the rapid rate, but the US Fleet has 10 super carriers capable of carrying 100 planes. Should a sea battle occur, China may succeed in taking Taiwan, but at incredible cost. So it’s not likely that China will invade Taiwan, however in five years’ time, the scenario starts to change a bit, but they’re not in a position today.

For that reason China will continue to pressure the borders with India, and they’ll pressure the borders with the Philippines. It’s about pushing people around rather than seeking a conflict. For this reason we have become China’s “whipping boy in the West” because we are an easy target. China will point to the world and say look what we do to Australian is you align to closely with the US or don’t toe the line on your foreign policy statements.

Saying that, China is now getting tremendous blowback. In the space of 12 months they have united a coalition of countries against them through their form of “Wolf Diplomacy”.

Against this backdrop, what are we doing. We are taking profits and taking growth off the table where we can. While we have had good tail winds and expect them to continue for a while yet,  we don’t know how long these will last and we don’t want to be the last people at the party. We reason with the tailwinds of artificial rates we can take lesser risk and still get above good returns for the risk we are taking. If things turn down quickly, we will have already reduced the down side risk and we will have enough cash to take advantage of buying opportunities when the time comes.

I hope this all makes sense. Always happy to speak

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