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Posted by Peter on 23/05/2020

The disconnect between ‘Main Street’ and ‘Wall Street’

Investopedia defines ‘Main Street’ as, “a colloquial term used by economists to refer collectively to America’s independent small businesses. It gets its name from a common name for the principal commercial street of small towns across the country. In England, the equivalent term is High Street.” ‘Wall Street’ on the other hand refers to, “big business and high finance.” Right now the disconnect between these two is about as big as it could possibly get. Not just in the USA but around the world.

Covid-19 has unleashed a financial crisis the likes of which we have not seen for a very long time. The seasonally adjusted insured unemployment rate in the USA for the week ending 25 April was 15.5% with a total of 33 million Americans filing for unemployment benefits. Some States in the USA are already running out of unemployment money and will need to borrow from the Federal Unemployment Account fairly soon.

The Washington Post on 11 May 2020 reported, “Two of President Trump’s top economic advisers projected Sunday that unemployment will climb as the coronavirus pandemic continues its sweep across the United States, with one official predicting that the unemployment rate will jump to 20 percent by next month.”

New York Governor Andrew Cuomo has stated that the coronavirus pandemic has left his State “basically bankrupt”. There are more to follow.

The USA is not alone. Every country has been affected with tens of millions of people losing their jobs. Big corporations are haemorrhaging cash (and suspending dividend payments) with no end in sight and many small businesses will not reopen when the lockdowns end. The Asian Development Bank has warned that the Covid-19 crisis could leave a US$8.8 trillion hole in the global economy.

With all this bad news one would expect the stock markets to be heading south. Apart from a small hiccup they have simply ignored all the bad news.

The Dow Jones Industrial Average (DJIA) tracks 30 well-known large companies that trade on the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (NASDAQ). The DJIA reached an all-time high of 29 551.42 on 12 February 2020 as a result of an 11 year bull market – the longest bull market in history.

The DJIA fell 1 597 points (about 6.3%) on 5 February 2020 although this was not the largest single day fall – that occurred on 29 September 2008 when the DJIA lost 777 points – almost 7% of its value. During the 1930’s Depression the DJIA lost nearly 90% of its value. The DJIA briefly entered a Bear Market earlier this year but has recovered strongly.

The DJIA closed at 24 331.32 on 8 May 2020 – a little over 17.6% off its all-time high on 12 February 2020. Most stock markets around the world have a similar pattern. News that would normally see stock markets fall sharply – like large unemployment numbers – now has them gaining ground. Wall Street is now taking bad news and turning it into good news. It makes absolutely no sense.

The disconnect between Main Street and Wall Street is starting to ring alarm bells. It would appear that greedy investors who are scared of losing out on a market bounce are prepared to accept huge risks in return for possible spikes in the market. It was John Maynard Keynes who said, “markets can stay irrational longer than you can stay solvent”. Wall Street is certainly behaving irrationally right now. Main Street is in a bad way right now and there is more pain to come and Wall Street seems to think we are about to restart the bull market. Perhaps reality will set in when companies report second quarter results.

A big part of the problem, in my opinion, is Reserve Banks pouring trillions of dollars of imaginary money into the markets. Many investors are of the opinion that Reserve Banks (especially the Federal Reserve in the USA) will do whatever it takes to protect the market and protect them from losses. They may be right – Berkshire Hathaway CEO Warren Buffet famously said, “It’s never paid to bet against America”, but he did qualify that by adding, “We come through things, but its not always a smooth ride.

Matt Egan from CNN Business on 12 May 2020 stated, “This is the most expensive time to buy stocks in 20 years.” The problem for investors is there is nowhere else to try and make money. Interest rates are at all-time lows and will remain there for some time.

Today’s investor would do well to remember Warren Buffet’s two investment rules, “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1”. Buying shares at the most expensive time in the last 20 years in the midst of a pandemic seems to me an almost sure fire way of losing money.

It is interesting to note that Warren Buffet has just sold all of his shares in the USA’s four largest airlines – United, American, Southwest and Delta Airlines. These shares were valued at more than US$4 billion and were sold at a loss. It would seem that he favoured a smaller loss now rather than a bigger loss later. While Warren Buffet – and his research team – were selling the airline shares at a huge loss someone was buying them.

Scott Pelley from 60 Minutes interviewed Fed Chair Jerome Powell with the interview airing in the USA on Sunday 17 May 2020. During the interview Scott Pelley asks Jerome Powell, “What gives you hope in this dark time?” to which Jerome Powell replies in part, “…I would say I would never bet against the American economy or the American people.” It would appear that Warren Buffet and Jerome Powell are singing from the same hymn book.

During the interview Jerome Powell made some interesting comments about keeping the markets functioning. This is how the conversation went:

PELLEY: Fair to say you simply flooded the system with money?

POWELL: Yes. We did. That’s another way to think about it. We did.

PELLEY: Where does it come from? Do you just print it?

POWELL: We print it digitally. So as a central bank, we have the ability to create money digitally. And we do that by buying Treasury Bills or bonds for other government guaranteed securities. And that actually increases the money supply. We also print actual currency and we distribute that through the Federal Reserve banks.”

So there we have it. Someone sitting behind a computer at the Fed simply creates trillions of dollars of imaginary money. Using a combination of smoke and mirrors (and some clever sounding financial terms) the Fed then lends this imaginary money to the USA government where it suddenly appears as real money for the USA government to spend. The Fed is not alone, right now all Central Banks are doing the exact same thing.

This is music to the ears of Wall Street. As long as the Fed is happy to keep pouring money into the market all is well. What could possibly go wrong? I cannot help but feel we are not too far away from the mother of all stock market corrections.

 

Posted by Peter on 11/05/2020

International Travel – what’s it worth?

As the world grapples with the fallout from the Covid-19 crisis, one thing that is abundantly clear is that international travel is at the back end of re-opening economies. Those countries that have managed to, using an overworked phrase, successfully flatten the curve and get their numbers under control will be loathe to suddenly open their borders and risk foreign travellers reintroducing the virus into their countries.

It will be a huge problem for those countries that rely heavily on international tourists but, with international tourism being such an important part of the world economy, almost every country will be affected. In 2018 there were 1.401 billion international tourist arrivals worldwide. These international trips generated US$256 billion in passenger transport and US$1.5 trillion in receipts at the destination. Travel for leisure and by air dominates international tourism.

In 2017, Tourism was the world’s third largest export category (US$1 586 billion) after Chemicals (US$1 993 billion) and Fuels (US$1 960 billion) and ahead of Automotive products (US 1 470 billion) and Food (US$1 466 billion). International travel is big business and vital for some countries. It is hard to believe that in a few weeks a little over US$1.7 trillion in international trade simply came to an abrupt stop. No-one knows what effect this will have on the world’s economy and it will take some time for the effects to be felt. What is however clear is that it’s going to hurt – badly.

The World Travel and Tourism Council estimate 75 million jobs are at risk and that in 2019, “Travel & Tourism’s direct, indirect and induced impact accounted for:

  • US$8.9 trillion contribution to the world’s GDP
  • 10.3% of global GDP
  • 330 million jobs, 1 in 10 around the world
  • US$1.7 trillion visitor exports (6.8% of total exports, 28.3% of global services exports)
  • US$948 billion capital investment (4.3% of total investment)”

For 2018 the top 10 international tourism destinations (by arrivals) were:

Rank Destination International Tourist Arrivals International Tourist Receipts
1 France 89.4 million US$67.3 billion
2 Spain 82.8 million US$73.8 billion
3 United States of America 76.9 million US$214.5 billion
4 China 60.7 million US$40.4 billion
5 Italy 62.1 million US$49.3 billion
6 Turkey 45.8 million US$37.1 billion
7 Mexico 41.4 million US$23.8 billion
8 Germany 38.9 million US$43.0 billion
9 Thailand 35.5 million US$63.0 billion
10 United Kingdom 37.6 million US$51.9 billion

Australia does not make the top 10 by arrival numbers (9.3 million) but ranks number 8 by International Tourist Receipts (US$ 45.0 billion).

China is the world’s largest market for outbound travellers with 150 million travellers in 2018. Approximately 10% of China’s 1.4 billion inhabitants travel internationally – well they did prior to Covid-19. Where do the Chinese go? Here are the top 10 destinations for 2018:

  1.  Hong Kong – 49 000 000
  2.  Macao – 27 500 000
  3.  Thailand – 10 100 000
  4.  Japan – 9 250 000
  5.  South Korea – 6 250 000
  6.  Vietnam – 4 800 000
  7.  Singapore – 3 600 000
  8.  Malaysia – 3 150 000
  9.  Cambodia – 2 750 000
  10.  Taiwan – 2 750 000

The United Nations World Tourism Organisation estimate that Chinese tourists overseas spent US$277.3 billion in 2018. By comparison, American tourists overseas only spent US$144.2 billion. The world desperately needs the Chinese (and everyone else for that matter) to start travelling overseas but it is hard to see how this is going to happen anytime soon. The sudden loss of overseas tourists is going to leave a gaping hole in the economies of many countries and this is going to compound the financial fallout from this crisis.

Australia and New Zealand are already floating the idea of a ‘trans-Tasman bubble’ which would see flights between the two countries resuming fairly soon and allow tourists to travel freely between the two countries. Both countries rely heavily on international tourists (and immigration) to support their economies and the loss of overseas tourists is going to put a huge dent in both governments coffers.

It is not hard to see why both countries are so keen to create a ‘trans-Tasman bubble’. There were 8.5 million international visitors to Australia in 2018 – they were arriving at a rate of 970 an hour – and 1.3 million of these visitors came from New Zealand. New Zealand tourists were second only to Chinese tourists.

For the year ending February 2020, 1 550 683 Australians travelled to New Zealand. This was more than from China (367 629) and the USA (370 879) combined. A ‘trans-Tasman bubble’ would go a long way to getting the much needed overseas tourists back in Australia and New Zealand but it would clearly be a far bigger benefit to New Zealand.

Given that both countries have been hit hard by the loss of overseas tourists it is however hard to see that either country will want to see that amount of money leaving the country and the tourism bodies in both countries will fight tooth and nail for every tourist dollar. Australia launched a ‘Holiday Here This Year’ campaign after the bush fires last year and they will no doubt be pushing that message hard.

The problem facing both Australia and New Zealand (and others who adopted a ‘go early, go hard’ approach) is that they cannot open their borders without a vaccine, unless of course they impose a 14 day quarantine for all overseas arrivals, which will in itself stop international tourists from visiting these countries.

Sweden adopted a very different approach and did not go for a hard lockdown and their infection and fatality numbers are not the worst in the world. They are in fact doing a lot better than some countries who did adopt a hard lockdown.

Sky News Australia recently interviewed Johan Giesecke – Sweden’s former state epidemiologist – who has suggested New Zealand may have to isolate international arrivals for the next decade. He makes a compelling case for Sweden taking the course that it did and if he is right those countries that adopted a ‘go early, go hard’ approach may well have wrecked their economies in vain.

 

While everyone desperately needs to see full planes and busy airports again I daresay it will be a while before we see those again. What is more likely is that we will see more ‘trans-Tasman bubble’ type arrangements between various countries.

Posted by Peter on 06/05/2020

How are we going to repay all this debt?

The world is already drowning in debt and governments are now borrowing and spending as if there is no tomorrow. The amount of money being spent is eye-watering. Where is it coming from and how are we (or more likely future generations) going to repay it?

The Institute of International Finance calculate that global debt at the end of 2019 was US$255 trillion (that’s 12 zeros). Global debt increased by US$3.3 trillion in 2018 and by US$10.8 trillion in 2019. 2020 will dwarf these figures. Global debt is now US$87 trillion higher than it was before the 2008 financial crisis. The world has simply been flooded with cheap money and this, in part, is the reason for stock markets climbing to record highs.

Household debt has been no exception, it has grown from US$35 trillion in 2007 to US$48 trillion at the end of 2019. Most of this has been in the developed world where households have used cheap money to fund extravagant lifestyles. Household debt – mortgages, auto loans, credit card and student debt – in the USA stood at US$14.15 trillion at the end of 2019. Switzerland has the world’s largest household debt to GDP (basically everything the country produces in a year), with Australia a close second. Australian household debt is now 120% of GDP.

How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” The dialogue is from Ernest Hemingway’s 1926 novel, The Sun Also Rises. I fear there are many around the world who are just about to enter the ‘suddenly’ phase of going bankrupt. At some point the piper has to be paid.

As the Covid-19 crisis has unfolded, governments have tried to solve the resulting financial crisis by throwing huge amounts of money at the problem. In March and April the USA spent US$2.8 trillion on numerous stimulus packages and there is already talk of another. The US Treasury Department said it would borrow US$2.99 trillion (from who?) between April and June to deal with the fallout from Covid-19. This is more than it would normally borrow in a year. Government debt for the USA is nearly US$25 trillion.

The IMF has stated that it “stands ready to mobilize its US$1 trillion lending capacity to help [its] membership.” Most governments have introduced similar measures. Some countries will be better placed than others but it is safe to assume that no-one had billions of dollars tucked away for such an emergency – unless of course those countries that have healthy Sovereign Wealth Funds decide to raid them.

In addition to governments borrowing and spending (or simply printing new money), their incomes have been decimated. Consumption is down and with it VAT revenues, jobs have been lost at an alarming rate affecting payroll taxes and company profits have been hard hit with the resultant loss in tax payable. A major source of income – tax on fuel – has also been badly affected. The full effect of the loss of income to governments will only be known in the months to come. Those countries that rely heavily on oil for their revenues will be severely affected. As the world placed itself in a coma so the demand for oil dried up. Those countries that rely heavily on tourism and immigration (like Australia and New Zealand) will also be severely affected.

The reasons for governments doing what they have done have been debated and discussed at length. It has been about saving lives. But at what cost?

I recently came across an open letter from the CEO of PSG Group, Piet Mouton, to President Cyril Ramaphosa in South Africa titled ‘Silence is no longer an option. He makes some very valid points that apply not only to South Africa, but the world in general.

To put PSG Group into perspective, their 2019 Annual Report notes, “Our market capitalisation (net of treasury shares) is approximately [ZAR] R57bn, [US$3bn] while we have strategic influence over companies with a combined market capitalisation of approximately [ZAR] R212bn. [US$11.2bn] I have over the years interviewed many of the senior staff of the Group and have the highest respect for them as a company.

Mouton states that South Africa does not have ‘the luxury’ or remaining in lockdown and that the only viable alternative is “a continued lockdown of the elderly and frail until the virus is contained or a vaccine becomes available, while the economy operates as close to normal as possible.

He makes the point that he is “… NOT arguing economy over lives. BUT the truth is that lives are inextricably linked to the economy. Our survival and wellbeing depend on whether and how quickly our economy recovers.

President Donald Trump (of whom I am not a fan) made the point, “We can’t have the cure be worse than the problem,” He later tweeted, “We have to open our country because that causes problems that, in my opinion, could be far bigger problems.” He was no doubt referring to the economy and the possibility of a depression – I think everyone agrees that a worldwide recession is a foregone conclusion.

It is a very difficult situation. On the one hand we have hundreds of thousands of people dying but on the other hand we have tens of millions of people who have lost their jobs (and their ability to look after their families); many millions in poorer third world countries will starve; millions will go bankrupt and future generations will take decades to pay off the debt we are now incurring. We cannot keep the world locked up for much longer without a real risk the whole system will collapse.

There is a clear link between unemployment and suicide. In February 2015 the World Economic Forum dealt with this in an article titled ‘The link between unemployment and suicide’. The article dealt with a study carried out by Carlos Nordt and colleagues from the University of Zurich which explored the link between increases in rates of unemployment and suicide.

The study “attribute[s] 45,000 – or one in five – suicides a year worldwide to unemployment, with a further 5,000 deaths caused by the economic crisis.” They noted “There were an estimated 233,000 suicides a year between 2000-11, of which around 45,000 could be attributed to unemployment. In 2007, the year before the crash, there were 41,148 identified cases of suicide. In 2009, this number had risen to 46,131 – an increase of 4,983 or 12%”

On 19 March 2020 the International Labour Organization (www.ilo.org) noted, “Initial ILO estimates point to a significant rise in unemployment and underemployment in the wake of the virus. Based on different scenarios for the impact of COVID-19 on global GDP growth, preliminary ILO estimates indicate a rise in global unemployment of between 5.3 million (“low” scenario) and 24.7 million (“high” scenario) from a base level of 188 million in 2019. The “mid” scenario suggests an increase of 13 million (7.4 million in high-income countries).” I think it is clear they vastly under-estimated the extent of the problem.

CNBC (www.cnbc.com) on 30 March 2020 noted “The coronavirus economic freeze could cost 47 million [American] jobs and send the unemployment rate past 32%, according to St. Louis Fed projections.” and, “There are nearly 67 million Americans working in jobs that are at a high risk of layoffs, according to the analysis.

By 23 April 2020, 26.5 million Americans had registered for unemployment benefits. For the week ending 23 April 2020, 4.4 million Americans registered for unemployment benefits – the weekly average prior to the Covid-19 crisis was 210 000. It is no different elsewhere in the world.

Many developed country governments are now paying companies to keep their employees on their payrolls. They cannot do so for an extended period.

A continued lockdown of the world will result in a significant increase in suicides over the next few years in addition to all the other issues.

Mouton’s comment that South Africa does not have ‘the luxury’ of remaining in lockdown applies to the world. He is, in my opinion, absolutely right when he says that the only viable alternative is “a continued lockdown of the elderly and frail until the virus is contained or a vaccine becomes available, while the economy operates as close to normal as possible.” We have to find some way to protect the elderly and the vulnerable but also allow businesses to open and the economy to return to some measure of normality.

Right now we need bold leaders who can come up with creative solutions. Simply trying to go back to a pre-Covid-19 world is not an option. As to who is going to pay for all this debt that we are creating, I hope that future generations will not judge us too harshly.

Posted by Peter on 29/04/2020

A nasty little virus!

Virus: A micro-organism that is smaller than a bacterium that cannot grow or reproduce apart from a living cell. A virus invades living cells and uses their chemical machinery to keep itself alive and to replicate itself. (www.medicinenet.com) This Covid-19 virus simply sees the human race as “chemical machinery to keep itself alive and replicate itself”.

Who would ever have thought that something so small could be so deadly and wreak so much havoc on the world. It certainly has turned our world upside down.

We had hoped to be sailing from Wyee to Airlie Beach now to spend winter in Queensland. We are however stuck here for the foreseeable future in partial lockdown. There are worse places to be in lockdown. The numbers in Australia are really good even though we are only in a partial lockdown. At the time of writing this Australia has 6 747 Covid-19 cases and 89 deaths.

In anticipation of the trip to Airlie Beach I put a post on the Crew Finder website looking for crew to help us get the boat to Airlie Beach. As the crisis developed we have been swamped with offers to crew. All of them had one thing is common, they were really just looking for somewhere to stay. We have had to withdraw the post. We even had two Americans offer us money to get them to one of the Pacific Islands.

We are in lockdown in our on-site caravan in Jasmine Lakside Village. We are fortunate, we can still go to the local shopping centre to do shopping and we can move around the park quite freely subject to the social-distancing requirements.

We still need to do some essential repairs to the boat and have permission from the Australian Police to go to the boat to do the necessary repairs.

Being in partial lockdown has given me some time to reflect on where we are and where we are going. There is no doubt that the world is in serious trouble and it is going to be a very long time before we go back to the way we were. That is of course assuming that the world financial system doesn’t collapse. Right now the world leaders are trying to buy us out of this financial problem but I somehow doubt that we, as a society, have enough money to buy our way out of this. The numbers being thrown around are simply staggering and I have no idea where all this money is coming from.

I somehow suspect the governments are simply printing money and we know how this worked out for Zimbabwe. Time will tell how this ends. The markets are extremely volatile but it seems to me the current volatility is all sentiment, we will have to wait to see what effect the lockdowns around the world are having on companies earnings. My personal view is that there are many companies who will not survive. Those individuals and companies that have survived the past few years on the back of cheap credit will find the next few months very difficult.

I have a great deal of sympathy for those who have spent many years building their business only to have it all fall apart now through no fault of their own. I remember only too well the sacrifices I made to build my businesses. 

I sold my last business just over 10 years ago and have spent the last 10 years traveling and seeing the world. Many of my peers have spent the last 10 years building their businesses at great sacrifice only to now see the business fall apart. Life is about choices I guess. I have paid a price for the last 10 years of freedom but given where we are right now I am certainly glad I made the choices I did 10 years ago.

There is no doubt that the world leaders will have to open their countries up again – the world simply cannot stay in lockdown much longer without a real risk of everything collapsing. There will however be a price to pay for doing so. They are going to have to make some very difficult decisions.

Our on-site caravan is fairly small and was designed as a holiday home, not ideal for a lockdown. We have converted the carport into an outdoor area so that we can spend time outside and have a little more space to live in.

The Australian government have been really good at providing support to their citizens and residents but have made it very clear that they will only support Australian citizens and residents – an “Australia first” approach. The are hundreds of thousands of New Zealanders and foreign students who are in dire straits but who do not qualify for support from the Australian government. Given that the borders are now closed they cannot go home even if they wanted to. I am not sure how they are going to cope in the next few months.

There are difficult times ahead.

Posted by Peter on 28/02/2020

Back to Maintenance

With the Cordalga trip now just a distant memory and a few trips to New Zealand since the trip, it is now time to seriously think about getting Great Escape somewhere warm for the winter that is fast approaching.

There are still however a few repairs that need to be done before we can leave. The last thing we want is a repeat of the Adelaide to Wyee trip. That trip saw us fixing something every time we stopped. Glenn had a similar experience with the Cordalga trip. We want to enjoy the trip and that means getting all the outstanding maintenance sorted out before we leave.

One of the things that needs to be fixed is the windows in the aft cabin. We did know one of the windows was a problem (the previous owner has simply applied a layer of what looked like glue to seal the window) and while living on the boat, the perspex in the other window came loose and popped out of the frame. They would both have to be resealed. This is not our favourite job, it requires getting rid of all the previous sealant and applying a new layer of Fix 15 – our preferred sealant.

It takes hours to properly clean the frames.

We have learnt the hard way that it is best to tape up every area where you don’t want Fix 15 – the specification sheet states that once it has dried the only way to remove it is through ‘mechanical removal’ – what they really mean is that you have to remove it with great difficulty.

And then the messy business of applying the sealant and getting rid of all the excess sealant.

It is for us a 2 day job but well worth it.

While doing this job we had a really bad storm and discovered that the hatch in the aft cabin is also leaking. It will also have to be resealed. Better now than after we leave.