Fed going dotty, ECB like warm porridge, DPRK, Trade harrumphing, Australian jobs, Healthcare, and more...

Last Night's Markets
The Fed: going dotty
ECB: warm porridge
The DPRK Détente
Trade war, or trade harrumphing?
More on Value & Growth
Australian jobs: not hiring…enough
Health: Out of pocket
Research and Diversions
Facebook Live
Next Week
Last Week

Last Night's Markets

The Fed: going dotty

The market is way out of line with the Fed’s dot plot now.

Wednesday’s rate hike from 1.75% to 2% was fully priced in, but the futures market is now discounting only one more hike this year versus the two implied by the median of the “dot plot” – that is, the individual forecasts of the 17 voting members of the Federal Open Market Committee (FOMC).

What’s more the market is now priced for three more hikes by the end of 2019, not the five that the FOMC members, on average, predict.

[caption id="attachment_154374" align="alignnone" width="600"] Source: AMP Capital[/caption]

Those predictions are in line with a very bullish Fed statement. Here are the main points, and how they differ from last time:

• “Economic activity has been rising at a solid rate”. This is an upgrade from the “moderate rate” of May, so the Fed has become more bullish on the economy.
• “…household spending has picked up”. This an upgrade from “moderated from its fourth quarter pace” in May, so the Fed is now more bullish on the consumer.
• “…the unemployment rate has declined”, which is an upgrade from “the unemployment rate has stayed low” in May.
• “…sustained expansion of economic activity” – yet another upgrade.
• “…business fixed investment has continued to grow strongly”. This is the only bit that was the same as the last meeting, but still highlights the Fed’s optimism on capex.

There was, in short, no sign of any likely pause in monetary tightening that might make the market expectation correct, and no sign of any concern about emerging market chaos as a result of higher US rates and US dollar, or even any mention of concerns about a trade war.

In other words, with the market and the Fed apparently diverging so much, somebody is in for a big surprise.

Maybe that’s why the mysterious volatility trader known as '50 Cent' is apparently back and has gone long the Vix again.

According to Business Insider, this person cashed in some long-standing volatility bets in February when the S&P 500 corrected 10% and the Vix soared, apparently making $183 million.

Now 50 Cent – or someone copying him/her - is back, and has bought 100,000 call options on the Vix index with a strike price of 28, at a price, as usual, of 50c apiece. With the Vix currently sitting at 12.94, that’s a bet that volatility is going to double over the next couple of months and will pay off big time if correct.

The reason it could be a good bet at least sometime in the next 12 months, is that no matter who is right about interest rates, markets could get rocky.

Given the Fed’s bullishness, something would have to happen for the market to be right that there will only be one more rate hike this year and three next year – either an economic shock of some sort, perhaps an all-out trade war, or out-of-the-blue market turmoil – some kind of “Minsky moment”.

If the Fed’s right and there are two more hikes this year and five next year, then the market will be wrong, and get a shock.

Either way, the market would correct and volatility would rise.

On a related matter, there were US$800 million worth of share buybacks by US listed companies last year and Goldman Sachs estimates the total will reach US$1.2 trillion this year.

Mike Lewitt in “The Credit Strategist” reckons there are 20% fewer shares outstanding today than 20 years ago, and as a result of the boom in private equity, there are half as many publicly traded companies around today.

Add to that the massive growth in passive index funds that are not price-sensitive and it’s a weird market these days, certainly different to when I was a lad.

I’m not sure what it all means, except that old rules might not apply.

ECB: warm porridge

The European Central Bank’s statement on Thursday night was hawkish but markets took it as dovish.

President Mario Draghi confirmed that the ECB expects to begin normalising monetary policy in 2019 while simultaneously achieving an easing in financial conditions. The euro fell 1.6%, bund yields fell 5 bps, the DAX surged 1.8% and the Europe-wide Stoxx 600 jumped 1.4%.

Asset purchases will be cut to EUR 15bn per month in Q4 and the ECB will then end net bond purchases, bringing QE to an end after EUR2.4 trillion of money printing.

What markets focused on in the ECB statement was the new stuff on interest rates: “We expect them [policy rates] to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with our current expectations of a sustained adjustment path.”

That was firmer, and more “dovish” than the previous guidance on interest rates.

It’s basically a continuation of the theme that is underpinning the bull market: growth with low interest rates. Otherwise known as “Goldilocks”.

The DPRK Détente

In my Talking Finance podcast yesterday, Daniel Flitton summed up the case for the affirmative in the debate over whether the Singapore deal this week was good or bad: it’s better than the US and North Korea firing nuclear warheads at each other.

It was a charade, and will almost certainly come to nothing, but talking is better than the alternative.

But Kim Jong Un’s commitment to the “complete denuclearization of the Korean Peninsula” is meaningless. His predecessors have paid lip service to that goal for years while at the same time industriously building nuclear weapons.

Donald Trump seems to think Kim can be bought with money – making him and his coterie richer than they are already by dropping sanctions and building flash hotels and condos on North Korea’s beaches. But that’s very unlikely.

What’s actually going on behind the all the theatre is an effort by China and South Korea to persuade the United States to accept North Korea as a nuclear state. That is the only way this thing ends well, with peace cemented so that everyone can get on with their lives.

It’s likely that Trump and his team understand that, which is why they did not demand a timetable for denuclearisation plus verification. They’ll keep talking on and off for a while and then quietly drop it, accepting North Korea as a member of the nuclear club.

At least we should all hope that’s what happens: if Kim agrees to what the acronym hunters are calling CVID (complete, verifiable, irreversible dismantlement) then that’s when we should start worrying.

James Traub, writing in Foreign Policy magazine this week, reminds us what happened in 1998, when UN Secretary General Kofi Annan flew to Baghdad in what seemed a hopeless mission – to persuade Saddam Hussein to give UN weapons inspectors access to sensitive sites.

The negotiations were tortuous and exhausting, but Annan eventually got Hussein to agree – he triumphantly waved his piece of paper and the inspectors duly flew in. But before long Hussein lost patience and kicked the inspectors out. The deal collapsed and 10 months after Annan’s trip to Baghdad, the US and UK bombed Iraq.

And Saddam Hussein didn’t even have any weapons of mass destruction, as we later learned, whereas Kim Jong Un not only has a vast nuclear programme with bombs and atomic paraphernalia secreted in tunnels scattered around the country, he has nothing else of any value.

What’s more he terrorises his citizens more than Saddam Hussein ever did and is less in need of either international legitimacy or America’s money.

So the best result would be for the talking to continue ad tedium and the timetable for CVID to be basically stretched to infinity. Either that or a formal acceptance of North Korea as a nuclear power.

The last thing we want is for the appalling Kim Jong Un to make any promises and for the nearly as appalling Donald Trump to believe them.

By the way, it is worth bearing in mind that North Korea remains the proverbial exemplar of the truism that any country with “democratic” in its name is anything but that.

The Democratic People’s Republic of Korea is not the “people’s” either, but is a brutal, repressive, kleptocratic hereditary monarchy.

At least Iran is a kind of democracy, doesn’t starve its citizens, has not developed nuclear weapons, had capped its uranium enrichment and has been accepting international inspections.

So, as an article in the Financial Times asked yesterday, “Why does Donald Trump treat Iran differently to North Korea?”

“For a variety of reasons the Trump White House has decided that Israel, Saudi Arabia, and the United Arab Emirates are more important friends of the US than our allies in Europe or Asia, and those countries are not interested in a diplomatic deal with Iran.”

Oh, and also because the deal with Iran was done by Barack Obama and Trump’s number goal is to tear down everything Obama did, simply because he did it.

Trade war, or trade harrumphing?

Having got China’s help in coaxing Kim Jong Un to Singapore for a pow-wow (although the North Korean leader seems to have been falling over himself to go) the US has now announced its punitive tariffs against $50 billion in Chinese imports.

Beijing announced last night that it will retaliate, without providing any details beyond saying the “countermeasures (would be) the same scale and strength”, adding: “All the economic and trade-related achievements previously reached by the two sides will be rendered invalid.”

“Trade War Brews,” said the Wall Street Journal. The market might wobble.

But… $50 billion is 10% of what the US imported from China last year and it increases the number of goods on which tariffs are imposed by 25%. That is, roughly US$200 billion of the US$500 billion in Chinese imports that Americans buy currently attract duties of $13.5 billion, and that’s before anti-dumping taxes.

So tariffs on another US$50 billion is a biggish deal, but an increment rather than a new thing.

Also, as James Kirby pointed out to me in the Money Café on Thursday, these are political decisions by Trump, not economic. That is, as with all politics, it’s the appearance that matters most, not the substance.

In other words, will there be a real trade war, with a real decline in world trade, or will there just be political harrumphing? I suspect the latter, although someone could make a mistake of course, and allow things to get out of hand. Especially the trade warriors in the White House.

So be alert, but not alarmed.

Australian jobs: not hiring…enough

There were no signs whatsoever in Thursday’s May employment report that the domestic private economy is picking up. Exports are fine, at least for a while, and governments are spending, but households and businesses are struggling.

Surging female participation plus immigration along with competitive markets is holding wage growth down and households are eating into savings and borrowing to maintain spending. That can’t last.

RBA Governor Philip Lowe was quite specific about the problem in his speech on Wednesday, saying that the current level of wage growth is a problem in a few ways.

It “diminishes our shared sense of prosperity”, and is “unlikely to make for 2.5% inflation on a sustained basis", so "a return, over time, to a world where wage increases started with a 3 rather than a 2 is both possible & desirable".

In the Q&A afterwards he mentioned that when he talks to company executives and suggests they pay higher wages, “they look at me as if I’m completely mad. It’s far too competitive for that.”

Meanwhile employment growth this year is half what it was last year, participation continues to rise in trend terms, having corrected a bit in May, and immigration remains high, especially to Victoria and NSW.

As a result while unemployment is low and falling, there’s still plenty of spare capacity. These two charts from Callam Pickering sum it up:

Underutilisation, by the way, is the addition of unemployment and underemployment, while underemployment includes those who have a job but want more work.

So the unemployment rate would need to fall a lot more for wages growth to pick up – perhaps even to 4% or less.

It means that, for the moment, GDP is largely irrelevant because it is dominated by net exports from non-labour intensive industries. Even if economic growth matches, or exceeds RBA forecasts, interest rates are going nowhere.

More on Value & Growth

Gerard Minack pointed out in a note this week that the outperformance of “growth” investing versus “value” has been going on for nearly a decade, and has been associated with the decline in long bond yields.

Given that, you might have expected that the recent rise in bond yields would have reversed things, but it hasn’t. In fact, the outperformance of growth has accelerated over the past 18 months.

This tells you that the real key to growth investing in this cycle has been earnings growth – that is increases in valuation have not contributed much to investing success. It’s all been about growth in earnings per share.

Says Gerard: “This is a critical difference to the out-performance of growth versus value in the 1990s TMT boom.  The bulk of the out-performance of growth versus value then was due to valuation re-rating.”

As a result, when valuations “mean-reverted”, as they always do, the boom ended with a bump. This time around it was more soundly based on eps growth but in the past 18 months has been driven by valuation.

At the same time, the US market has significantly outperformed the rest of the world.

Both of these trends – growth and US outperformance - have been driven by technology, that is the FAANGs, or as TCI member Graeme Newing suggested to me the other day, the MAAFIA stocks – Microsoft, Amazon, Apple, Facebook, Intel, and Alphabet.

But actually it’s a mistake to leave out the N, for Netflix – it’s the best performing stock on Nasdaq this year and second best in the S&P 500, up 98% year to date.

Anyway, the point is that the US technology sector not only has higher profit margins than the rest of American industry, but they’re higher than technology companies outside the US as well.

Gerard doesn’t think it can be sustained through an extended Fed tightening cycle, which is fair enough.

My view is that the Great Disruption, for that’s what it is, has a very long way to run, and doesn’t have much to do with the Fed.

It goes in waves: search, social media, cloud computing, online retail, smartphones and video streaming have underpinned the margins and outperformance of the FAANGs or MAAFIAs up to now.

The next waves that we can see coming are autonomous cars, drones, and blockchain, as discussed with me by Steve Sammartino in Thursday’s Facebook Livestream. Add to that “everything as a service”, which is a big coming trend.  And then there are the things we can’t quite see, such as quantum computing.

Steve thinks Facebook will fade because of blockchain. Perhaps, but I’m not so sure.

I think this group of companies has the cash and the ambition to stay on their feet surfing the waves of tech disruption coming.

Health: Out of pocket

After my interview with Mark Fitzgibbon of NIB the other day, TCI member and anaesthetist, Charles Loader, wrote me a few helpful and interesting emails that I think are worth passing on, with his permission:

Hi Alan,

I listened with interest to Mark Fitzgibbon. I thought it was reasonably balanced. There is no doubt the system is complicated and the overall cost is a problem but a couple of points should be made. Most of the cost problems apart from a few exceptions are not related to doctors' costs. Take for example prostheses, implantable devices and cardiac stents etc. Even though it was discussed I think you glossed over the NIB system of payment in terms of what the casual listener may not totally appreciate. 

NIB is an outlier in that it is the only health fund to not allow a "co-payment". If the doctor's fee is above NIB’s predetermined rate the rebate will default to the schedule fee. To illustrate this see the following example.

I give you an anaesthetic for say a knee scope. My fee is $430.00. (This is only about half the AMA rate.)

You are insured with say BUPA or Medibank Private (or basically anyone else other than NIB)

I will bill your health fund for $330.00. (You won’t see that until they send you the details of the claim. ie. I am effectively claiming for you)

I will send you a bill for $100.00. Easy!

You are insured with NIB.

I will send you the total fee of $430.00. You will receive only $180.00 back from NIB (the schedule fee). Your out of pocket is now $250.00.

(Of course I could accept the grossly inadequate NIB fee of $330.00 and you would have no out of pocket- and we do in cases of genuine financial difficulty or aged pensioners etc.)

Also you would have had fully informed financial consent prior to the procedure as is the policy of the ASA. 

Finally, I must admit I am very sympathetic to the patient as a consumer as they really are just "the meat in the sandwich”. 

(Disclosure: I have no financial interest in any health fund and am not making any recommendation as to a choice of health fund.)

---

Hi Alan, 

Just a quick follow up on yesterday’s email. The figures I quoted are rounded for simplicity. All the health funds vary a little bit in what they rebate but those numbers are pretty close and serve the purpose for the explanation. I find personally that many patients have no idea how the NIB system works until they have a hospital admission. I’m sure it’s in the product statement somewhere but it does not seem to be made very clear. I think they have a duty to their customers to make it patently obvious. This is also a problem with websites such as  “iSelect" where the bias may well be to a cheaper inferior product.

The NIB system does two other things also. Firstly it makes the doctor look like the bad guy because of the potentially larger gap and secondly if the doctor does charge his or her normal fee (above NIB’s) it will then save NIB money as the rebate they are required to pay is reduced. It is particularly bad for an urgent complex after hours procedure where there is a potential for very large out of pocket expenses if the doctor does not direct bill NIB and the patient is necessarily unable to be given proper informed financial consent. Most doctors I know under this situation feel very bad for the patient but at the same time they feel shortchanged themselves if they get up in the middle of the night for life saving surgery and are rebated significantly less than their true worth which is the situation if they direct bill NIB. Many I think probably just direct bill NIB out of compassion for the patient’s situation but it really is pretty unfair for both sides. 

The Medicare rebate for the procedure I quoted is $135.00 approx. so really the NIB basic schedule fee rebate under this situation is not much more than what they would have received if they had no insurance at all. Let’s not forget that NIB is a listed company and has its shareholder interests at heart as well as the patients. Hope it all makes sense. If you want a really good explanation of the system “Choice” had a recent edition which was pretty accurate. All the best.

I rang Charles up and told him I didn’t fully understand what he was talking about, so he sent a final email with a helpful analogy:

Hi Alan, 

 Here’s an analogy that may make sense regarding NIB’s claiming system. There are of course some differences but this is essentially how it works. 

Imagine you damaged your car and the insurance company agreed the claim was worth $4000.00.

You decide to take your car to your panel beater because he’s close to home and you like his work. He says the cost of repairs will be $5000.00. You are happy to make up the extra $1000.00.

The insurance company says that’s all fine but unfortunately, we will now only reimburse you to $1000.00. It’s now going to cost you $4000.00 of your own money if you want to get your car fixed at this panel beater. 

You are being penalised even though you were happy to make up the $1000.00 difference initially.

You are not happy and ask why. They may give the usual reasons such as “He’s not one of our preferred dealers” or “that’s just the system” or whatever. Either way you're still unhappy and will weigh up your options. 

I then asked Mark Fitzgibbon to respond to Charles’ comments. Here is what he sent:

“There is significant variation in the fees of medical specialists. However 9 times out of 10 nib members will not pay an out of pocket expense as the specialist accepts our no gap "Medigap" arrangement. 

It's why today we are guiding our members towards those specialists who will most likely accept our Medigap offer. Our MediGAP schedule offers a payment on average of almost 40% above the Medicare Schedule Benefit and we believe it is reasonable and fair. In terms of “known gaps” nib’s products do not include “known gaps” or “co-payments” as in our view this is inflationary and creates a licence to charge more. 

The observation that in some cases it may be lower than some other health insurers is moot. First, there is no correlation between specialist fees and clinical quality. Second, both the patient and public interest are ultimately best served by their health insurers seeking cost effective Medigap arrangements.”

In other words, Charles is right: Mark Fitzgibbon is trying to control the prices that doctors charge and he believes that the prices he is imposing are fair.

Whether they like the prices or not, and they often don’t, most doctors just don’t want to be told what to do. They are fiercely independent and plan to stay that way – they don’t want to become quasi-employees of health funds.

This is a fascinating and important struggle that has a long way to play out.

It probably doesn’t affect many of your investments, unless you’ve got a lot of NIB, Medibank Private or the hospital companies, but it is definitely going to affect other aspects of your finances, and life.

Research and Diversions

Research

The Tax Office has published a rundown of all the changes to tax returns this year – and there are a lot of them. It’s worth a glance.

For now, the market has "priced in" most of the "known" risks to some degree. What hasn't been "priced in" is unexpected economic weakness, a credit related event, or a new geopolitical risk currently not on the horizon. These things happen, and while the current backdrop is very positive for stocks currently, not paying attention to the risks has very negative consequences.

The Economist: Donald Trump is undermining the rules-based international order. He appears to see the world as he saw the New York property market, a place of screw or be screwed.

A senior White House official defines the Trump Doctrine: “We’re America, bitch.”

Why Democrats shouldn’t impeach Donald Trump if they win the House.

North Korean leader Kim Jong-un's flight to Singapore was a tightly planned maneuver using a decoy to throw attackers off the scent. First to arrive in Singapore was an IL-76 transport plane carrying food and other essentials for Kim as well as his bullet-proof limousine and a portable toilet that will deny determined sewer divers insights into to the supreme leader's stools.

A bit of background on Kim – the report of the commission of inquiry on human rights in North Korea in 2014 (372 pages). A taste: “the Commission finds that DPRK authorities have committed and are committing crimes against humanity in the political prison camps, including extermination, murder, enslavement, torture, imprisonment, rape and other grave sexual violence and persecution on political, religious and gender grounds.”

Meet the guys who tape Trump's papers back together. The president's unofficial 'filing system' involves tearing up documents into pieces, even when they're supposed to be preserved.

Malcolm Turnbull is talking bollocks when it comes to bracket creep, says Sahne Wright, economics editor of The West Australian. Couldn’t agree more.

Food delivery is spearheading Australia’s so-called “gig economy”. And here, Uber Eats leads the pack: “Uber Eats is already the leading meal delivery service for so-called "Metrotechs", or early adopting predominantly young, single, well-educated, inner-city professionals."

China’s attempting to unify its hardware and software industries into the one ecosystem: “China’s technological edge is in e-commerce, the internet, mobile payment systems and big data, while areas like chip design and fabrication, and the development of operating systems were key weaknesses that were controlled by others.”

Christine Lagarde, head of the IMF, believes the global trade system of the future, and in many ways already of today, will be one defined not by physical goods but of data.

Starting with his calls to lock up “crooked Hillary”, Donald Trump has tried to politicise the sacredly apolitical Department of Justice. Defending against these attacks “are men and women devoted not to a boss who directs them but to a professional mission defined by centuries of tradition.”

In the latest edition of his Train Wreck series, John Mauldin explains why Italy’s political problems might be the “trigger” that ignites a continent-wide financial disaster. “All it takes is one of [these spots of instability] to bring the whole structure down.”

It seems Trump’s team has fallen so far down the rabbit hole of their own counter-factual narratives, they’ve forgotten that they themselves are the authors, and now genuinely fear the boogeyman they created. The theory has become so widely accepted that people in the West Wing are paranoid that the F.B.I. has multiple informants working to take down Trump. “There’s a paranoia about who else is one,” the official said.

Algorithms will soon be assessing creditworthiness and making lending decisions, but even they might be susceptible to the same mistakes made by humans, and because of the black box nature of algorithms, we won’t know why they occurred.

Among Trump’s gang of cronies currently being investigated by Mueller, Paul Manafort may be the one most destined for the clink. In addition to the two dozen charges of conspiracy, money laundering, and tax and bank fraud charges, he’s now been charged with witness tampering by way of a monitored cell phone - “a fact that might have occurred to him while under house arrest, wearing not one but two G.P.S.-enabled ankle monitors.”

This is quite interesting, although I’m not sure I’m with him: Bernard Keane of Crikey has prepared “An incomplete list of evidence that Australia is becoming a police state.”

Rhett Kessler of Pengana Capital: six reasons we love CSL.

If Europhile Lord Rothermere had not dithered in sacking Paul Dacre as editor of the Daily Mail, Brexit wouldn’t have happened, says Roy Greenslade. Fascinating piece.

Interesting review of Quinn Slobodian’s history of neoliberalism. Early-20C neoliberals worried mainly about securing property rights, which implied a strong and impartial state. This priority made them opponents of absolute laissez-faire. “If we desire a free market, the framework of conditions, rules and institutions must be all the stronger and more inflexible.

The rise of the new extremists: “a Muslim liberal I know once asked Tommy Robinson why he didn’t stop playing the game of inciting anti-Muslim bigotry and find a proper job. ‘Fine,’ came the reply ‘if you can tell me where else I can make £4,000 a month.’ Denied traditional employment, Robinson turned to the world’s biggest bank: the Web.”

The models that inform climate policymaking are fatally flawed. We are almost certainly underestimating the economic risks of climate change

Diversions

Here’s the amazing fake movie trailer that the White House made for Kim Jong Un, in case you haven’t seen it yet.

Another “in case you missed it” video – the marvellous video mash-up of “Donald Trump 007 GoldenHair” on last Sunday’s Insiders.

This stunning: 45 things I learnt in the gulag. No.30: “I discovered that the world should be divided not into good and bad people but into cowards and non-cowards. Ninety-five percent of cowards are capable of the vilest things, lethal things, at the mildest threat.”

I often spout my thoughts on Twitter, but my days doing so may be numbered. A former executive has described it as “just an ass-backward tech company… It’s a technology company with crappy technologists, a revolving door of product heads and C.E.O.s, and no real core of technological innovation.”

Despite its current upheaval, America remains for many the place where dreams come true. Here are some of these dreams, and how they came true.

Bill Maher on why Trump might just be above the law.

The French artist Pierre-Auguste Renoir had much in common with his also-artist father, including a fondness for his father’s artistic muse, whom Pierre-Auguste got hitched with just week’s after his old man died.

Seniors don’t want to live in “islands of old age”, they want to live in Margaritaville.

There are no longer any “laws” of physics; at best there is a landscape, and most of its dimensions are hidden from us, we cannot measure its properties directly, we can only deduce and guess. “It’s helpful to visualize the landscape as a largely undeveloped wilderness, most of it hidden under thick layers of intractable complexity. Only at the very edges do we find habitable places. In these outposts, life is simple and good. Here we find the basic models that we fully understand.”

Anthony Bourdain, Kate Spade and the dangers of envying “perfect lives”.

Notes on a life spent listening to Radio Peking. “As students in a late-Cultural Revolution university, our lives were marshalled by the radio. News programs were shouted into the canteens while we ate; morning classes were interrupted by broadcast callisthenics; lunch was midday news and warnings about the shifting tide in class struggle; afternoon broadcasts replaced tea time and the evening meal was ushered in by further news and updates on the state of the revolution”.

What if Star Wars never happened? Without the earnings from Star Wars, Twentieth-Century Fox implodes. Without Fox News, George W. Bush loses the 2000 election.

No significant musical birthdays this week, so here’s someone new for you. It’s Maggie Rogers, who has “gone viral”, partly because of this video of her with Pharrell Williams, when he was teaching a music class at New York University, and she played her song for him. His response is priceless.

https://www.youtube.com/watch?v=TyimCGEkiUc

And here she is with her hit, Fallingwater, which is also pretty good.

https://www.youtube.com/watch?v=bR1d8l92Q8Q

Facebook Live

If you missed #AskAlan on our Facebook group this week (or if you don’t have access to Facebook) you can catch up here. And we've just given the Facebook Livestream its own page where you can also opt to just listen to the questions and answers.

https://www.youtube.com/watch?v=ZDD9SYm4M3M

If you’re not on Facebook and would like to #AskAlan a question, please email it to hello@theconstantinvestor.com then keep an eye out for the Facebook Live video in next week’s overview.

Next Week

By Craig James, CommSec

Australia: Jobs, business and consumer surveys dominate

• It’s probably fair to say that there are no ‘top shelf’ economic indicators for release in either Australia or the US in the coming week. But as always the indicators round out our knowledge of how the economies are performing.
• The week kicks-off on Monday with the “Overseas Arrivals & Departures” publication from the Australian Bureau of Statistics (ABS). As well as providing data on tourist arrivals and departures, there are figures on longer-term migration flows.
• Tourist arrivals rose by 2.6 per cent to a record high of 771,600 in March. Departures rose by 4.1 per cent in March to a record high of 908,100. Arrivals are up 9.0 per cent on the year with departures up by 6 per cent.
• On Tuesday the minutes of the last Reserve Bank Board meeting are released. Each meeting there is a special issue or topic that is discussed. And that discussion can prove useful in gauging member views on interest rate sensitivities.
• In terms of economic data, on Tuesday the ABS releases its publication “Residential Property Price Indexes”. The data is relatively “old”, up to just the March quarter. But apart from prices there is other data covering the average value of homes and changes in the number of homes in each state.
• Also on Tuesday is the regular weekly gauge on consumer confidence from Roy Morgan and ANZ.
• On Wednesday the Reserve Bank Governor, Philip Lowe, participates in a panel discussion at the at the Forum on Central Banking, hosted by the European Central Bank in Portugal.
• In terms of economic data, data on skilled vacancies is released on Wednesday with the CBA Business Sales Indicator.
• On Thursday the ABS issues the population data for the December quarter as well as detailed figures on the labour market. Australia’s population expanded by 395,613 people over the year to September 2017 to 24,702,851 people. Overall, Australia’s annual population growth rate rose marginally from a downwardly-revised 1.60 per cent (previous 1.61 per cent) to 1.63 per cent – still the fastest population growth in around 3½ years.
• And the detailed job data will include information on employment by industry. The job market is coming off a record year in 2017 and employment growth is still well above average as is the growth in the number of people entering the job market.
• Also on Thursday the Reserve Bank releases the quarterly Bulletin.

Overseas: US housing data dominates

• In the US over the coming week there will be a raft of indicators on the housing market including starts, home prices and sales of existing homes.
• The week kicks off on Monday in the US with the National Association of Home Builders releasing the activity survey for June.
• On Tuesday, data on new construction – the number of homes where work began in May – is released. Over the last seven months, starts have been bouncing around at an annualised pace of 1.20-1.35 million. Starts stood at a four-month low in April of a 1.287 million annual rate.
• Also on Tuesday the regular weekly data on chain store sales is released.
• On Wednesday, data on the current account deficit will be released with existing home sales. There is around four months worth of supply of homes on the market. Sales have tracked sideways over the past year.
• Also on Wednesday, the regular weekly data on mortgage finance is issued.
• On Thursday the US leading index is released with monthly data on home prices and the influential Philadelphia Federal Reserve survey.
• The US leading index is designed to show where the economy is headed, and on the basis of the 0.4 per cent increase in April, the economy has solid momentum.
• Also on Thursday in the US is the regular weekly data on new claims for unemployment insurance.
• On Friday the Markit “flash” or preliminary readings on activity in the services and manufacturing sectors are issued. And the survey results aren’t just issued in the US, but also France, Germany, Eurozone and Japan.

Financial markets

• Well, the first six months of 2018 is almost completed. So it is an opportune time to see how global sharemarkets and currencies have performed.
• CommSec has tracked the cross rate of 120 currencies against the US dollar over the year and only 18 have appreciated since the start of the year. And gains have averaged just 1.4 per cent. Around 20 currencies are unchanged against the greenback while the remainder have weakened, averaging losses of 3.3 per cent.
• The Colombian peso is strongest, up 4.2 per cent, followed by the Japanese yen. The weakest is the Venezuelan bolivar, falling from 9.975 bolivar per US dollar to 79,800 bolivar/USD. The Australian dollar is 90^th, down 2.7 per cent.
• Across 73 sharemarkets, 37 have risen over 2018 while 36 have fallen. The Ukraine market is strongest, up 40 per cent while Turkey is down 17 per cent. The Australian sharemarket is in 41^st spot, down 0.6 per cent this year.

Last Week

By Shane Oliver, AMP Capital

Investment markets and key developments over the past week

• The past week saw most share markets gain as strong US data more than offset worries about a more hawkish Fed and tariffs, the ECB remained dovish, Italian risks receded a bit and the US-North Korean summit was seen as successful. Chinese shares were not helped by soft economic data but gains in global shares generally and lower bond yields helped the Australian share market with yield sensitive utilities and telcos being the strongest. Bond yields generally fell and while metal prices fell, oil and iron ore prices rose. A mildly hawkish Fed and strong US data at the same time as a dovish ECB and softer non-US data saw the US dollar rise to its highest since July last year and this saw the $A fall back below $US0.75.

• Good news on North Korea and Italy, but the trade war threat remains. The Trump/Kim summit was a big deal for world peace and while some critics wanted more no major peace deal has been achieved in a day – that it happened, that there is agreement to work towards the complete denuclearisation of the Korean peninsula, that there will be follow on talks to implement this and that the US will suspend military exercises is the best that could have been hoped for from the summit. It gives investors a bit of peace on this issue for at least a year. Tick for now. On Italy and Itexit worries there was a bit of relief with new Italian Finance Minister Tria saying that there has been no discussion of an Itexit. Budget conflict with the European Commission still lies ahead but our view remains that Italy stays in the Euro. So tick for now. Meanwhile the trade war threat remains with the US set to announce a final list of $50bn of Chinese imports to be subject to a 25% tariff. No tick here. Just bear in mind though that this should be no surprise to anyone as it’s what Trump’s May 29 statement said the US would do by June 15, it’s still just another list and not yet implementation of the tariffs and if implemented they would cover less than 2% of imports to the US so we would still be a long way from the Smoot-Hawley 20% tariffs on all imports that helped make the Great Depression “great”. Trump also sees these announcements as a way of pressuring China into action on trade – so more classic Art of the Deal stuff. Ultimately a negotiated solution is likely – and this is what both the US and China want - but the risks are high and the tariffs could well be implemented before the issue is resolved.

• Major central banks slowly taking away the punch bowls but it’s very gradual and there is still lots of punch around:

  • The Fed provided no surprises in hiking rates again for the seventh time this cycle but yet again it was a bit more hawkish and the “dots” have moved to four hikes this year. Our view remains four hikes this year and three next and we continue to see US money market expectations as too dovish. This should all mean ongoing upwards pressure on US bond yields but its worth nothing that US rates at 1.75-2% are still far from tight and so we are still a long way from the point where US growth is threatened.

• The ECB made no changes to monetary policy but confirmed that it “anticipates” ending its quantitative easing program in December after further phasing it down to €15bn/month through the December quarter. However, its been tapering its QE program since 2016, its left the door open to extending QE into 2019 if needed (by making its ending “subject to incoming data”), its indicated it will reinvest maturing assets for an “extended period” and that it expects no rate hike until at least mid-2019 and ECB President Draghi’s comments were dovish. It took the Fed more than a year after ending QE before it started rate hikes. With inflation way below target, growth indicators softening a bit lately and uncertainties around Italy a rate hike is unlikely until 2020 at the earliest. So ECB easy money may be getting a bit less easy, but it still looks like remaining easy for a long while yet.

• Finally, the Bank of Japan remains full steam ahead with its ultra-easy monetary policies. No surprise here with the economy contracting in the March quarter and core inflation falling again.

While talk of the ending of ultra-easy monetary policy globally generates periodic excitement in markets and amongst commentators it’s worth noting that its now more than five years since the US “taper tantrum” started it all off – so its been a very gradual process – and I suspect global monetary policy will remain easy for years to come. Just less easy than it was.

Major global economic events and implications

• US economy accelerating. Small business optimism rose to its second highest ever (with surging worker compensation and profit readings), retail sales growth was very strong in May, jobless claims remain ultra-low and consumer, producer and import price data for May show a continuing edging up in inflationary pressures and point to core private consumption deflator inflation (which is the Fed’s preferred inflation measure) rising to 1.9-2% year on year for May. The Atlanta Fed’s GDPNow growth tracker puts June quarter growth at 4.8%.
• Eurozone economy still slowing. Eurozone industrial production fell in April consistent with some softening in Eurozone growth – which will present a bit of a threat to the ECB’s plans to end its QE program in December.
• China slowing too. Chinese data mostly softened suggesting the long-awaited mild slowing in growth may be underway. Unemployment edged down in May to 4.8% and home price gains picked up, but industrial production, retail sales, investment and credit growth all slowed. This may reflect noise in monthly data, but it may also be reflecting the impact of deleveraging measures which have hit “shadow banking.” This is broadly consistent with our view that GDP growth will slow to 6.5% this year. But more moves to ease monetary policy are likely to ensure growth doesn’t slow too much.

Australian economic events and implications

• Australian data was back to being a bit on the softish side. Business confidence slipped a bit in May but remains solid, consumer confidence remains stuck around long term average levels, housing finance continued to slow in April with tighter bank lending standards pointing to more weakness to come and jobs data was a bit soft in May. Employment growth was weaker than expected with full time jobs falling and while unemployment fell slightly this was because of a decline in participation. Meanwhile underemployment rose slightly over the last three months to 8.5% so total labour market underutilisation remains very high at 13.9%.
• While RBA Governor Lowe reiterated the mantra that the next move in interest rates is likely to be up, he also said any increase “still looks to be some time away” and indicated that to raise rates the RBA is looking for reduced labour market slack, faster wages growth and increased confidence inflation is picking up. At present there is no sign of reduced labour market slack and this is likely to continue to weigh on wages growth. We remain of the view that with trend growth likely to be remain subdued, bank lending standards tightening, Sydney and Melbourne house price falls having further go that the RBA won’t start raising rates to 2020 at the earliest and in the meantime the next move being a cut can’t be ruled out.

What to watch over the next week?

• Apart from the ongoing issues around trade, the focus in the week ahead will remain on central banks with Fed Chair Powell, ECB President Draghi, BoJ Governor Kuroda and RBA Governor Lowe all participating in a panel discussion in Portugal on Wednesday. It’s doubtful that any of them will say anything new having all just had meetings or made speeches, but no doubt their comments will be watched for any clues on the monetary policy outlook
  In the US, expect home builder conditions (Monday) to remain strong, housing starts (Tuesday), home sales (Wednesday) and home prices to all rise and the June business conditions PMIs (Friday) to remain strong at around 56-57.
• Eurozone June business conditions PMIs (Friday) will be watched closely to see whether the recent softening trend continues.
• The Bank of England (Thursday) is expected to leave monetary policy on hold particularly given recent softer data and ongoing Brexit uncertainty.
• Japanese core inflation data for May (Friday) is expected to show a further dip to 0.3% year on year (from 0.4% in April) consistent with Tokyo inflation data already released.
• In Australia, ABS March quarter data is expected to confirm a 1% or so decline in home prices (Tuesday) consistent with already released private sector surveys and population growth data (Thursday) for 2017 is expected to show continued strength of around 1.6% year on year with Victoria the strongest on the back of high immigration levels and interstate migration. The minutes from the RBA’s last board meeting (Tuesday) are likely to confirm that the RBA remains comfortably on hold.

Outlook for markets

• Volatility in share markets is expected to stay high as US inflation and interest rates move up and as issues around President Trump (trade, Mueller inquiry, etc) continue to impact, but the medium-term trend in share markets is likely to remain up as global growth remains solid helping to drive good earnings growth. We continue to expect the ASX 200 to reach 6300 by end 2018.
• Low yields and capital losses from rising bond yields are likely to drive low returns from bonds. Australian bonds are likely to outperform global bonds helped by the relatively dovish RBA.
• Unlisted commercial property and infrastructure are still likely to benefit from the search for yield, but it is waning, and listed variants are vulnerable to rising bond yields.
• National capital city residential property prices are expected to slow further as the air continues to come out of the Sydney and Melbourne property boom and prices fall by another 4% this year, but Perth and Darwin bottom out, Adelaide and Brisbane see moderate gains and Hobart booms.
• Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.2%.
• The $A likely has more downside to around $US0.70 as the gap between the RBA’s cash rate and the US Fed Funds rate pushes further into negative territory as the US economy booms relative to Australia. Solid commodity prices should provide a floor for the $A though in the high $US0.60s.