How politics and business are comingling

Summary: Trump's approval ratings, Australia's federal election, our miners and our banks, and shopping strip malls

Key take-out: It seems politicians and regulators aren't understanding the delicate state of the market. Maybe investors should take to the streets themselves. 

The business of politics and investment is becoming even more intertwined. Let’s look first to the US where President Trump is growing more and more confident that he can win a second term.

He sent an email around the world earlier this week revealing that a Gallup Poll showed that 69 per cent of Americans expect their personal finances to be even better next year. That is just shy of the 71 per cent achieved in the middle of the internet boom by former President Bill Clinton. 

That was followed by another survey showing that, after his State of the Union Address, President Trump achieved a 52 per cent approval rating – his best showing in 23 months. This might be perceived as good for markets because the candidates that Democrats are putting forward are hard left and not at all good for markets. For Trump to win, he needs a strong Wall Street.

Wall Street wants a China deal and does not want the Government to shut down, so unsurprisingly, we are now seeing signs from the Trump camp of compromise and Wall Street loves it. But as we all know, Trump can change his mind, and if he does, Wall Street will fall. However, armed with high approval ratings, President Trump will now believe he can blow the Democrats out of the water.  

Here in Australia, markets assume that Labor is going to win the next election and I am certainly not disputing that likelihood. But there are cracks appearing in the ALP façade. 

The refugee issue has given Prime Minister Scott Morrison the momentum and fire that was previously lacking. And the other big crack in the ALP façade is that I don’t think many ALP politicians understand the franking credits issue. But the older generation of Australians certainly do and, as we have discussed before, so do their children. At the same time, the Liberals are putting forward impressive small business policies, albeit these are long overdue. If the stock market thinks Morrison has a chance, it will be a bull force in the stock market. The flow-on from the fall in house prices presents the biggest threat.

Right now, the Reserve Bank of Australia is very jittery that the Australian economy will start to slide. Our central bank has flagged the possibility of lower interest rates, with that forecast battering our local currency. The Australian dollar will get more of a battering if the US dollar starts to ride a Trump wave. 

Meanwhile, we are seeing the most wonderful conditions for some of our major miners. Iron ore prices are going through the roof on the back of the Brazilian disasters, rain in Chile is boosting copper, and this is all happening at a time of a falling Australian dollar. Naturally the prices of mining stocks are rising. 

For the next few years, we are going to be well placed in iron ore because Brazil, our major rival, is going to need to spend a lot of money fixing up its mines. Looking longer term, the Chinese will redouble their efforts in Africa because they want a strong rival to Australian iron ore. But that is down the track. 

Among the banks, we are now relaxing because it was feared the Hayne royal commission would impose new clamps on banks. They didn’t do this, but they did lock in the current lending practices and attack the brokers, which had become a key distribution system for banks. If the brokers are forced to retreat, then the banks are going to need to hire many new staff and reskill their people to enable them to do the work of the brokers. 

My great fear is that, if there is a rapid move against mortgage brokers, the weakening of the banking distribution system will intensify the credit squeeze with all the bad consequences that follow. At this stage, I simply don’t think the politicians or the regulators understand the risks that are involved given the delicate state of the market.  

At the shops

A great deal of Australian wealth is tied up in small shopping centres. Investors have bought shops all around Australia, with these investors often being retirees who rely on the income. Over the weekend, I was yarning to a person who runs a Prahran café and catering centre. Her market is dominated by young people who live in apartments. She explained that these people usually only shop for food and drink, buying everything else online. She is having a ball, with her business going strong.

The business is in the surrounds of Chapel Street, once a retail mecca, now studded with empty shops. This isn’t uncommon across shopping strips. My café owner says investors that own shops on Chapel Street shops are not willing to lower the rents, and so it is no longer economical to operate a shop on the street. In time, the owners will change, the rents will come down, and a new series of shops probably serving food and drink will emerge. At this stage, too many strip shopping centre owners are in denial and don’t understand the game has changed. But that means facing a capital loss. And, of course, the same thing is happening to many smaller malls that are having difficulty adapting to the new environment.  

Retailers who can pick the market continue to surprise, and there is no bigger surprise than JB Hi-Fi. The shorters picked JB Hi-Fi as a stock to hammer and major short positions were developed. Once again, the big institutions loaned the stock to the shorters to enable them to lower the price of JB Hi-Fi shares to the disadvantage of the people that the institutions are looking after. But that’s another story.

Then came the JB Hi-Fi result, which surprised the market enough for the stock to surge. That surge was boosted by shorters covering their position. As I have discussed before, your own personal experiences – good and bad – can often be a real guide as to what the market will later be told.

During the week, I found myself in a JB Hi-Fi store that was incredibly crowded with young people. They seemed to have found a way of communicating with the younger generations. I needed an attachment for my Apple computer. The Apple store (unsurprisingly) didn’t have it and sent me to JB Hi-Fi. 

I went to purchase the attachment from a young sales assistant who handed me what turned out to be the wrong part, but he was being watched by an older person who quickly realised the mistake. That level of careful monitoring is absent from most retailers and I suspect that it is a part of the JB Hi-Fi retail system. In any event, I left a happy customer, and later watched the JB Hi-Fi profit rise.