This has been a big week, even by recent standards…
A matter of Truss
Yes, the puns abound, but the satirists and cartoonists who'd almost perfected their version of Liz Truss are going to have to start again.
Or not, if Boris is given back the keys to Number 10 Downing Street (I'm not sure if he's even had a chance to return his set yet, which could make things easier). In that case, they just need to hope they didn't shred all of the old BoJo material – they might need it!
Other than the sheer tragi-comedy of the thing, markets seem satisfied that the worst has passed, with the Pound and UK bond yields ('Gilts' in the jargon) heading back towards normal.
The UK palaver was a mess from beginning to end, and a reminder that half-baked ideas and blatant populism (sometimes) don't mix. Or maybe we've just found the point at which they stop mixing!
Either way, there are lessons for our own government(s) – politics is always going to be politics, but you can't bend the laws of finance much more than you can bend the laws of physics: eventually something's going to break.
When good numbers are bad
I'm loathe to mention the very funny Betoota Advocate article imagining what RBA Governor Phillip Lowe might say, in his more honest moments – not because it's not very, very funny, but because the language is very, very, very blue. It's not for the faint of heart, or the even-slightly offended. Seriously, please don't even think about Googling it unless you know and like their stuff — the language will offend.
But the gist – that Lowe would really, really, like us to stop spending so much – is spot on.
And it's why recent economic data, which has been so good, is… well… not.
GDP growth has been strong. Unemployment is low and even though it's unchanged at 3.5%, a whole lot of Aussies were able to move from part-time to full-time work.
Those are really good things.
Except when you're trying to slow an economy.
No, Lowe doesn't want people added to the dole queue.
No, he doesn't want a recession, if we can avoid it.
But almost every bit of data (the latest was strong business condition data from a National Australia Bank Ltd (ASX: NAB) survey, yesterday) shows the economy in ruddy good health.
(Remember, inflation is an output, not an input.)
I do a bit of media. Usually, I'm all smiles when I get to talk about how well the economy is performing. I still try to be positive – it is good to see people in work, and businesses succeeding – but what it really means is that rate rises have further to go. Unfortunately.
Sometimes, you gotta rant
Most of my time is spent on investing and economics. But that's invariably intertwined with politics and general public policy.
I had a good long go at addressing the problems with the taxation of Superannuation (both the hole it leaves in the Budget and the (un)fairness of where the tax burden falls as a result. I think I have a decent solution, so if you haven't read it, I reckon it's worth your time.
I also did a Twitter poll (I don't usually do them) on what my followers thought of gambling ads. 80% of people who responded thought they should be banned. Me too. I'm not a fan of rules and restrictions for the sake of it, but if we can help vulnerable adults and impressionable kids, I reckon we should take the opportunity. Don't you?
But back on pure investing, I hope you're doing okay with volatility. Some people took (respectful) exception to my use of the Vanguard Index chart the other day. If that's you, I hope you'll read my response to their critiques.
And sometimes you gotta chill
We're in a funny time, economically. Perhaps that's an understatement. But it's important to remember what game you are (and aren't) playing, to know how the news and current events impact you.
Or doesn't.
Higher inflation absolutely impacts businesses that don't have pricing power, squeezing margins.
Higher interest rates absolutely crimp the earnings of businesses with a lot of debt.
And higher interest rates mean assets are worth less than when rates are lower (essentially because the more you get from cash in the bank or government bonds, the less attractive it is to take a risk on other, less secure, assets).
So those things are true, and bear thinking about.
As Warren Buffett said, a couple of years ago on CNBC:
"We are sitting very, very little inflation with the Federal Reserve putting a target at 2% not that long ago. … Since money doesn't cost anything, you can print lots of money and have full employment and no inflation. … I wouldn't think you can have these things at these levels — long-term rates, interest rates, budget deficits — have that at a stable situation for a long period of time"
And
"The convergence of these factors would seem impossible to me. Generally if I feel something is impossible, it's going to change over time. I don't know in what way, but I don't think we can continue to have these variables in this relationship."
Not for the first time, Buffett was right.
But, here we are.
And, as hard as it is, we still have to sift through the constant fire-hose flow of noise to grab what matters, and discard what doesn't.
Me?
I'm doing two things.
I'm trying to work out the underlying earnings power of businesses I'm interested in. That means trying to adjust for one-off (COVID) or recurring-but-cyclical factors (including, but not limited to, economic waves) to see what sort of regular (or average) profitability I can expect from a business.
Then I'm asking myself whether today's prices are attractive, or not, relative to that future.
See what's not in there?
I don't need to guess what inflation will be, next year.
I don't need a view on whether we'll have a recession, or how long or deep it might be.
Yes, I need to make sure the company won't go broke if there is one, but I don't need to have a high-conviction view on its severity or length.
Which isn't a guarantee, of course. A 10 year plunge into a Depression that makes the Great Depression look tame is always possible, I guess. But likely? No, I don't think so.
If I thought that, I'd be stocking up on shotgun shells and baked beans, not shares. (But also, my money isn't much good to me in that environment either… and no-one is buying your gold or Bitcoin (CRYPTO: BTC)!)
So yes, follow the news, if you want. As a responsible, concerned citizen, have a view on policy and what it means for the country and your fellow citizens. And please, be an informed voter, when the time comes, whichever way you end up casting your ballot.
But as an investor? You really have to tune out the stuff that just doesn't matter, and is more likely to distract than assist.
Quick takes
Overblown: We're in the lead-up to Treasurer Chalmers' first Budget. Meaning we're in the middle of selective, well-timed leaks to make sure the government maximises the PR benefit. Same as the last lot, and probably just one of those things we have to live with. But of all the things to pay attention to, you can ignore the "$11 billion blowout" headline for the Stage 3 tax cuts. Oh, I think they're unaffordable in general, but the 'blowout' is less than a 5% increase and essentially just a recalculation on updated numbers.
Underappreciated: I saw some numbers the other day, suggesting that Berkshire Hathaway, Warren Buffett's gargantuan investment conglomerate, has beaten the market over the last 16.5 years or so. Here at home, investment company Washington H. Soul Pattinson has also got a very strong long-term market-beating track record. I own both, for the record. I'm not saying ignore growth companies – they can be great. as I mention below. But don't assume the 'boring' ones aren't worth owning.
Fascinating: Victoria is bucking the trend of 40 years of one-way asset transfers – privatisations from the public sector – to essentially go back into the power business. I don't have an arbitrary rule on this stuff – the work should be done by whichever sector can do it best, on a case-by-case basis – but it's a gutsy call with some incredibly ambitious timelines, particularly on carbon reduction. Ignore the ideologues who tell you it's never going to work, or those who say it's the best thing since sliced bread – it's going to be a closer race than either group thinks.
Where I've been looking: My Motley Fool Money podcast (shameless plug) co-host Andrew Page and I chatted small caps on the podcast episode that's being released this afternoon (Friday), and he makes some compelling points. I've been digging around for growing, currently- or almost-profitable small- and medium-sized businesses, with solid balance sheets, that the market is ignoring. There's a few I'm going to be doing more work on.
Quote: "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." – Paul Samuelson
Fool on!
