US macro, Aus lockdowns

Today’s topics

  • US macro, markets, & SAA
  • Soft commodities
  • Inflation
  • COVID (NSW lockdown)

US macro, markets, & SAA

The defining story of 2020 and 2021 is the below graph of US disposable personal income, which remains notably above the pre-pandemic trend (+4% above, as of last Friday’s print).

Keeping incomes whole, at a time in which spending collapsed, prevented a replay of the Great Recession, and as such, has allowed spending to almost return to prior trend levels.

The combination of the two graphs is arguably proof that recessions, with all of the loss in employment, income and wealth that they entail, don’t need to happen. That line of thinking is very popular with the left, with the MMT-er’s (modern monetary theorists like Stephanie Kelton) and increasingly with centrists.

For markets, it’s up there with “the Fed put”, the idea that the Central Bank will always look to support markets in the event of a material drawdown in risky assets. Eliminating the negative feedback loop between the economy and the stock market would arguably support higher multiples for the market in perpetuity, via a lower required equity risk premium, and by the reverse hysteresis effect of likely higher productivity and growth.

In combination with the expected ongoing strength in labour markets, and the economy more broadly, you’ve got a very strong case for continuing to deploy capital inline with SAA portfolios (and using DAA to deploy tilts at the margin).

Soft commodities (& IPL)

The soft commodities continue to retrace. Wheat, Soybeans and Corn have now joined lumber, which was the “first” commodity “up” in the 2021 supply squeeze, and so far, is the leading on the way back down.

By the time Incitec (IPL) get the Waggaman plant (their big US based ammonium nitrate plant) back up and running the whole strong-ag-pricing-signal-demand-for-fertiliser story will have played out. IPL is a cheap, cyclical business that should be shooting the lights out, but isn’t due to ongoing operational issues, and remains of interest to us, given Value is hard to come by in the current market.


Friday’s PCE deflator was a modest miss, relative to expectations for the MoM. Still, the annualised rates are high enough to give the “not-transitory” camp some confidence that inflationary pressures continue to build. We remain in the transitory camp.


Today marked the first full trading day of the NSW lockdown. Travel stocks featured prominently (WEB, QAN, FLT, CTD) as did REITs (URW, SGP, VCX, LLC). Childcare, similarly to the last lockdown, was sold off (GEM) as was consumer credit (APT, Z1P), although both would strenuously deny that they are indeed “consumer credit”, let alone “unsecured consumer credit” in the middle of a hit to consumer incomes. We own Vicinity and G8 Education, and are comfortable given a) our attractive entry points and b) our expectation of both government support (fiscal) and financial support (the banks waiving interest, and landlords waiving rent) should the lockdown drag on.

Stocks like QAN are appealing to our process, as QAN is a high quality airline, and should the lockdown continue to pressure the share price, could well be of interest to our portfolios.

The online discretionary names (RBL, KGN) did well, as did consumer staples like WOW, MTS, COL (as panic buying of toilet paper continues to prove a reliable trade). Defensive names like Spark Infrastructure (SKI) that are, generally speaking, unimpacted by the ups and downs of demand, even at the level of the overall economy, outperformed.

Pleasingly we own COL, SKI, ABC, CSL, and BHP, all very high quality businesses. We continue to see stocks like APE, JBH, SUL as overearning, and expensive.

Like most, we expect the lockdown to be effective (as we’ve seen them now dozens of times, across the world, and know they work) and as such are not anticipating making any sizeable alterations to the portfolio just yet. The key for Australia will be to accelerate the vaccine deployment, and until that reaches a critical mass, such market impositions may well continue periodically.

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