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Welcome to Firstlinks Edition 351

  •   1 April 2020
  • 25

The S&P/ASX200 index finished up 4.6% last week, but it petered out towards the end and the lead from Wall Street is weak following a loss of 1.5% in the S&P500 on Friday. Despite some strong weeks recently, the MSCI World Index of global stocks is down 25% from its 23 January 2020 peak. 

The damage caused to returns by coronavirus is evident in the one-year numbers to 31 March 2020. Despite good performance in 2019, the S&P/ASX200 Total Return index (including dividends) is down 14.4% for the year, and even worse, the A-REITs sector (property trusts) lost 31.3%. Property is supposed to display defensive characteristics. The small caps index is down 21%.

On the life support package, the $130 billion wage stimulus is astounding in its generosity. Spent over six months, it's equivalent to the annual budgets for defence, education and health combined. A cafe owner told me a casual dishwasher who was paid a maximum of $60 for two hours work a week for the last 18 months now wants the $1,500 a fortnight payment.

The AFR reports that of the nation's 81,400 sales assistants, 72% work part time with an average weekly income of $451. The cafe owner doubts the dishwasher will ever return as she will save so much in the next six months. A 100% wage coverage up to a $1,500 cap, not a flat rate, seems more appropriate, or are wage increases paid by the government at a time of mutual sacrifice simply an unintended consequence?

The Grattan Institute commented on the stimulus:

"A broad wage subsidy will also make it harder to shift workers from idle sectors (where their pay is subsidised) to expanding ones (where it won’t be). No doubt more wrinkles will be found, and exploited, in time. But given the imperatives of speed and scale for these economic rescue packages, these imperfections are tolerable."

We asked Shane Oliver how the $200 billion of stimulus will be funded and whether there is any limit to the largesse. Yes, the unprecedented government fiscal response was needed, but there are future consequences which mean the amount must be fully justified and targetted.

Governments which have pushed hard for decades for Australia to become a market economy, with open borders, budget surpluses and a tight rein on welfare, have thrown away firmly-argued principles. Newstart (now JobSeeker) was held firm at about $550 a fortnight, which was clearly inadequate but apparently all the country could afford. Now it's doubled as JobSeeker and tripled as JobKeeper. Desperate times, indeed.

PM Scott Morrison is making incredibly tough decisions in the most testing of circumstances, and he said:

"Our goal is to protect the lives and livelihoods of Australians, to protect and preserve the very economy that we will depend on so significantly in the months ahead, and on the other side as well, for the generations that will follow us out of this. Many countries, in the months ahead and perhaps beyond that, may well see their economies collapse. Some may see them hollow out. In the very worst of circumstances, we could see countries themselves fall into chaos. This will not be Australia."

Former Governor of the Reserve Bank, Bernie Fraser, said on Tuesday:

"The packages that have been put together in recent times are very expensive. There is going to be an awful overhang of debt and at some point there is going to have to be a bit of reckoning with that and some winding back."

This week, we also tap into comments by the legendary investor Howard Marks, who in his latest memo to clients concludes:

"I would say assets were priced fairly on Friday for the optimistic case but didn’t give enough scope for the possibility of worsening news. Thus my reaction to all the above is to expect asset prices to decline. You may or may not feel there’s still time to increase defensiveness ahead of potentially negative developments."

Investing requires a plan for decades not days, and markets are moving 5% to 10% in hours at the moment. The US is shaping up as the main long-term economic problem, as the state-run responses and ambiguity of the President's position means lockdowns will be inconsistent. New cases and deaths will occur for a lot longer than the three to six months everyone is hoping for.

The assumption of unlimited demand for US Treasuries is also dangerous, as Professor Tim Congdon of the Institute of International Monetary Research says:

"The market in US Treasuries may be the most liquid on the planet, but that does not mean it overrides the laws of supply and demand. Investment institutions’ capacity to absorb that volume of debt – at current yield levels (in the 10-year area) of under 0.7% - must be in doubt."

In a humanitarian context, the most worrying consequences are for the billions of people in Africa, the sub continent, the Pacific Islands and parts of South America and the Middle East, who do not have access to clean water and health facilities. Many live in slums, need to work each day and cannot self-isolate. The world is staring down the barrel at millions of deaths. The Worldometer website is a great resource for accurate statistics.

A bear market rally?

We saw a strong stockmarket bounce from the initial fall, an impressive recovery of 15% in Australia from the 23 March low to yesterday, but rises always happen during bear markets. Overall, the S&P/ASX200 was down 24% in the March quarter.

Buyers attempt to find the bottom after a sell off as stocks look cheaper, the market rallies until there's more bad news, and the bear continues growling, as it did in the GFC. It's easy to forget how often markets improved during a multi-year decline, as shown below. 

S&P500 falls and rises during GFC

Source: Jamieson Coote Bonds

The blue lines show the initial fall from October 2007 to about March 2008, followed by several months of recovery. It was not until September 2008 that the market really collapsed.

Rather than picking tops and bottoms of markets, more important are the words of Nobel Laureate Daniel Kahneman. He says the key to good investing is:

“ ... a well-calibrated sense of your future regret.”

Since most people dislike losses far more than they enjoy gains, I believe market conditions call for a defensive stance.

We are now publishing most days to the website

Firstlinks is receiving more articles than ever, too many to include in the weekly newsletter without making it longer than the bible. So we are now publishing new pieces to our website as they come in. Please visit there regularly for the most up-to-date contributions.

This week, we feature John Reckenthaler's explanation of the four stages of a typical bear market, and we are somewhere between two and three.

Two further pieces on the virus: Gofran Chowdhury says this is a good time to adjust investment portfolios, while Campbell Harvey shows why small to medium businesses will bear the brunt of the coming recession. Also loaded as an extra on the website, Frank Uhlenbruch provides a chart illustrating each bear market is different.

On managing SMSFs, Graeme Colley says SMSF trustees need to realise their Investment Strategy is under scrutiny, while Alex Denham explains the rules for accessing money from super at a time when many people will be cash-strapped.

On a brighter note, Mark Williams looks with optimism at how technology companies make not only good investmennts, but they also contribute to a cleaner planet.

Legal firm Foulsham & Geddes has provided a checklist for companies, directors and maybe individuals to follow in these unprecedented difficult conditions.

Two White Papers hot off the press with new views on coronavirus. Western Asset calls the Fed stimulus initiative a game-changer in ways we do not expect, and MFS Investment Management says panic is the enemy, and disolcations throw up strong investment opportunities.

Morningstar is seeing a dramatic increase in traffic through its newsletters and website, including record sign ups for its Premium services as investors seek independent commentary. For a free four-week trial, click here.

Graham Hand, Managing Editor


Featured Articles

How $200 billion is magically created - Shane Oliver

Australia is in a relatively good position to borrow $200 billion, with the RBA using printed money to buy bonds in the market. The long-term consequences are better than the alternative. Read more…

Howard Marks' latest on 'Which way now?' - Graham Hand

Howard Marks is the largest investor in the world in distressed securities. What does he think after checking the virus positives and negatives, and how much has he changed his mind in only a few days? Read more…

Four stages of a typical bear market - but is this typical? - John Rekenthaler

Bear markets caused by recession fears follow a pattern, but we have never seen anything like coronavirus. If financial stimulus and medicine prove ineffective, all bets are off. Read more…

Small business in path of COVID-19 tsunami - Campbell R. Harvey

The turning point in this crisis will be when the number of new COVID-19 cases starts to decrease. Until then, can we mitigate the damage to businesses and the economy so that we can snap back? Read more…

Why technology stocks are good for the future - Mark Williams

Over the long term, the technology sector has a vital role to make the essential transition to a more sustainable global economy and a cleaner planet. We highlight a few names with strong prospects. Read more…

Avoid complacency with your SMSF's investment strategy - Graeme Colley

Many trustees of SMSFs have become complacent about vague Investment Strategies, but fund auditors and regulators are paying far more attention. Ensuring your fund complies requires some simple changes. Read more…

How an SMSF member can access cash under COVID-19 rules - Alex Denham

The wide range of measures introduced due to COVID-19 include relaxation of some superannuation rules, giving some people access to cash. But watch other rules as it's not a super open-house. Read more…

Six steps in COVID-19 emergency plans for companies - Foulsham & Geddes

Businesses and directors must take steps to deal with new restrictions as a result of COVID-19. Here are six actions all companies should consider in these trying times. Read more…

Volatility is the new normal, so it’s time to adjust your portfolio - Gofran Chowdhury

The impact of COVID-19 on investments shows there's no place for complacency in a world of VUCA (volatility, uncertainty, complexity, ambiguity). How often do you stress-test your portfolio? Read more…

Sponsor White Papers

Panic is the enemy - MFS Investment Management

COVID-19 is leading to unprecedented economic destruction across the world. While the human and financial cost will be enormous, dislocation also presents opportunities. Investors will need patience and a long-term horizon to benefit. Read more…

The Fed’s latest initiative is a game-changer - Legg Mason

The Fed policy initiatives introduced in recent weeks together represent a game-changer for the economy - in ways that go beyond what you might think. Read more…

Recent updates

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Indicative Listed Investment Company (LIC) NTA Report from Bell Potter

Latest LIC (LMI) Monthly Review from Independent Investment Research

PDF version of Firstlinks Newsletter

Plus updates and announcements on the Sponsor Noticeboard on our website


Richard Hopkins
April 07, 2020

Many thanks for reinstating the consolidated PDF of your highlights of the week. I appreciate the difficulties in these rapidly and hugely changing times; even more I appreciate your editorial expertise in providing a path through the noise in such an excellent weekly digest. Thanks again.

Arthur Kingsland
April 03, 2020

This is a disaster. It may have taken a little effort to make the amalgamated PDF, but it is almost impossible to get the whole picture when your internet access is less than adequate.

Graham Hand
April 03, 2020

The full PDF is now posted in Recent Updates above.

April 03, 2020

I like to print the full PDF version of Firstlinks. Up to date this has been possible with a single link click.
How do you recommend I obtain a full PDF version of your excellent newsletter?

April 03, 2020

I know I am not the smartest when it comes to computers, but I cant find the pdf button, I rang a friend who I put onto this site years ago and he has just rang back and said sorry mate neither can i.

Geoff McClelland
April 03, 2020

Graham, Firstly many thanks and secondily I'm happy to wait for a consolidated PDF to appear later. While I often read the occassional article immediately when published, I rarely get to read the whole newsletter until Saturday but do very much enjoy being able to read it in full in a consolidated format.

April 02, 2020

Please have a pdf of the consolidated version. I'm happy to wait until later in the day

April 02, 2020

Yes, a consolidated PDF please.

I'm looking for quality, curated content - not lots of content and lots of links to follow.

Remember Glad Wrap changing the cutter bar?

Keith Kennedy
April 02, 2020

Please revert to consolidated PDF version

April 02, 2020

Much prefer a consolidated version and happy to wait. Thanks.

Richard Hopkins
April 02, 2020

I too often prefer a consolidated PDF to read when I’m unplugged from machines, and going back for follow-up as desired later when I’m reconnected. It’s always a great weekly digest, thank you.

Jason Zanini
April 02, 2020

Hi Graham, also put me down for the single consolidated pdf version mailing list, even if it only shows the Featured Articles it was easier to print it out and read away from work (& distractions) rather than always looking at an electronic screen all day and all evening. The time delay is of little consequence, I would typically read FirstLinks on the weekend anyway. Many thanks and keep up the great work.

April 02, 2020

Bring back the pdf version please

April 02, 2020

Hi Graham, I too would VERY MUCH prefer the consolidated PDF version. Easier to take with you and read, easier than loading and printing each article that you want to read, and much better than loading pages you want and closing the browser and losing the lot (or forgetting what was loaded!!) (Old age You know.)

David More
April 02, 2020

Why get rid of great .pdf version?

April 02, 2020

Please go back to the PDF version - I can wait either later in the day or the following day

Jason Zanini
April 02, 2020

Hi Graham, also put me down for the single consolidated pdf version mailing list, even if it only shows the Featured Articles it was easier to print it out and read away from work (& distractions) rather than always looking at an electronic screen all day and all evening. The time delay is of little consequence, I would typically read FirstLinks on the weekend anyway. Many thanks and keep up the great work.

Geoff Catt
April 02, 2020

Much prefer a consolidated version and happy to wait. Thanks.

Sally Shaw
April 02, 2020

Please reinstate the consolidated version, for me and hubby this is much more useful; this is transferred to an Ipad so my husband can read it when he has time and not stuck sitting in front of computer. The PDF link on each article??? Where is it - I have looked at several articles and cannot see a link only a print link.

Graham Hand
April 02, 2020

Hi Sally, if you click the print icon above each article, you can select on your computer whether to print as a PDF, or save as a PDF. Thanks for your feedback on the consolidated version, we're receiving a lot of requests. G

April 02, 2020

In my business, we lost most of our turnover so we had to let 15 casual staff go and kept a few - all we had work for. After Job Keeper was announced, we took back two employees who we previously stood down. We don't have the cashflow to pay wages while waiting for the government's payment. Once we see how this pans out and whether wages will be subsidised, we may take on one more.

The other casuals were either not eligible (not been with us for a year), were not worth taking back or only worked small amounts of hours in minor roles. We had 2 workers who I wanted to take back but couldn't both due to visa status.

I don't know if our cautious response is indicative of the whole, but the estimates in the news of half the workforce being returned look exaggerated to me.

Rodney Clark
April 02, 2020

I too prefer the consolidated version.

Tony Reardon
April 02, 2020

There is a world of difference between the statement in the article that “Newstart was frozen at about $550 a fortnight since 1994 ...” and the actuality which is that Newstart has been indexed to inflation since 1997 and thus what can fairly be said is simply that it hasn't increased in real terms. In dollar terms it was a bit less than $300 a fortnight back in 1994. Part of the complaint is that the indexing has been to CPI whereas pension indexing has been more complex but essentially was greater by taking average earnings into account although pensions were also indexed to CPI prior to 1997.

Graham Hand
April 02, 2020

Hi Leigh, due to the time involved in creating it after we have finished editing everything, it usually delays publishing the newsletter. There is a PDF link on every article. However, if there is enough ongoing demand for a consolidated version, we may start a separate mailing list where we send it later in the day to anyone who wants it. G

Leigh Murray
April 02, 2020

Are you still providing the consolidated version of Firstlinks - with the referenced articles enclosed?


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