How GDP Fooled Aussie Punters


And away we go — the property cycle is getting back to business as usual.

It was only last week I said the current interest rate buffer on new loans was idiotic and should be abolished.

Yesterday, we found out that’s more than likely now. The financial regulator is on track to get rid of it shortly.

Suddenly, the outlook for property is not so bad. We’ll have less strict borrowing requirements, a government deposit scheme — and a lower interest rate.

No wonder the ASX hit an 11-year high on Monday. Financial stocks lapped it up.

I still like Aussie stocks from this level.

Just this week, I saw another reason why the market is much hotter than anyone would think given the mainstream headlines.

It proves again that GDP is utterly useless for helping your investment decisions…

GDP: Useless and misleading

I was looking over some previous articles of mine this year, trying to find an older post.

I came across a different piece in March where I explained my thinking on why the latest GDP statistics (at that time) were useless and to ignore them.

It was pretty simple: Data like that is backward-looking while the market is always scoping out what’s ahead.

Now we have this point from Reuters[1]

Australia’s export earnings are booming as resource prices surge but a statistical quirk means tens of billions of dollars go missing from main measures of growth, making the economy seem weaker than it actually is.

What’s going on here? It’s a quirk in the way statisticians go about things. The implications are astonishing.

These guys are always trying to work out what the ‘real’ growth rate of the economy is versus the ‘nominal’ rate.

What that means is that they need to try and nut out whether prices and growth rates are higher just from inflation or genuine productivity growth.

Higher prices from inflation usually means nobody is better off — except when it comes to resources.

Higher prices are a genuine boon to Australian commodity producers…

Instinct says always go with the market

For example, iron ore is now over US$100 a tonne.

That’s why there are rivers of money flowing into stocks Fortescue Metals Group [ASX:FMG] and Rio Tinto [ASX:RIO].

These can, in turn, gush out dividends to their shareholders — who can then get on with the fun of spending them.

But if you don’t pay attention to the stock market and rely solely on the mainstream reporting of GDP, you wouldn’t know this was happening.

There’s a $41 billion difference between nominal and real exports. That’s a serious amount of ‘missing’ money.

Go back to March. The mainstream headlines at the time warned that Australia was in a ‘per capita recession’ — but based off the GDP numbers!

Here is a perfect example of why your primary instinct should always be to go with the market over news.

The market was already running higher from the big drop into December…and it’s kept going.

See for yourself here…

Source: Optuma

Granted, resources aren’t the entire game in town…but they’re a big chunk of the ASX top 50.

Here’s another point to consider: It’s possible that the second half of 2019 sees even stronger demand for commodities.

That’s because China’s current stimulus could take a good six months to filter through to commodity prices.

And China has been revving up its credit machine over 2019 in response to the trade war.

And now we have a much better outlook for the banks, too.

The improved outlook for the property market removes a major fear around them. We also know that they’re aggressively cutting costs. The market should like that.

If the cash rate is going to 1%, we could see the banks accumulated for their dividends, if nothing else.

I remember chatting to my uncle (a retiree) at last year’s AFL Grand Final. He told me he sold out of CBA because of the banking royal commission.

He wasn’t happy about losing the income. Guys like him will be tempted to get back in — if they haven’t already.

Suffice to say, I still see lots of opportunity around the market. The higher it goes, the more press it gets, and the more people feel pressured to join the party.

I keep saying the same thing. Be bullish in 2019. Go here to take advantage of it.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

[1] ‘Australia’s Exports Go Missing…’, Reuters, May 13, 2019.