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Worrying Trend for Aussie Retail

31 January 2020

Precious Metals Commentary

Gold continued higher this week to $1,577 and silver slightly higher at $17.90. Obvious concerns of the coronavirus sent the AUD/USD lower to 0.671c, which saw an all time high AUD gold price of $2,362 on Thursday, before retreating back to $2,346 at time of writing.

Gold remains in a steep uptrend in AUD terms, with the likely near term catalyst being the news of how the virus progresses globally in the next two weeks. Given the fact that anyone with the virus can be contagious for two weeks despite having symptoms, we probably won’t know the true severity of the situation until another week or so, but reported cases have the potential of going parabolic given the long incubation period.

Gold - Continuous Contract (EOD) Chart

Fears of the economic effects of the coronavirus have impacted commodity prices this week. Brent crude is down 7%, copper fell by 9%, platinum fell US$27 an ounce and palladium dropped over $100 an ounce. Global stock markets largely shrugged off the event so far which is bizarre. We do not expect news to get better any time soon, so expect markets to wake up in the next few trading days.

Worrying Trend of Aussie Retail

Towards the end of last year, we saw a number of retailers going into voluntary administration, with Harris Scarfe (66 stores, 1800 employees) and Bardot (54 stores, 530 employees) being the most high profile. Other companies include burger chain Benny Burger, seven Red Rooster outlets in Queensland, fitness company Muscle Coach, the restaurant chain Criniti’s, discount chain Dimmeys and Co-op Bookshop.

Most of the stories cited the impact of online shopping and while certainly that has been a challenge to bricks and mortar stores, it isn’t a new development and we note that online retailers like Stylerunner and Zauli were also affected.

Come January, however, we saw a flood of store closures and voluntary administrations:
  • Jeanswest - voluntary administration, 988 employees affected
  • David Jones - 2 store closures
  • EB Games - 19 store closures 
  • Mc Williams Wines - voluntary administration, 146 employees affected
  • Bose – closure of all stores     
  • Curious Planet – 63 store closures
  • Kaufland - complete withdrawal from Australia, 200 employees affected
No doubt these were in trouble before Christmas but did not want to announce anything lest they affect their sales during the crucial holiday period, which is a significant percentage of annual sales, or they were waiting to see if a good Christmas could pull them out of a hole.

After a flat October for retail sales, November showed a stronger than expected 0.9% increase resulting from growth in business on Black Friday. However, that may just be Australians doing Christmas shopping earlier at discounted prices.

It will be interesting to see December’s retail sales figures when they come out next week. We think that the January store closures and voluntary administrations indicate that consumers are tapped out and that even businesses doing sales aren’t making much profit on them due to discounting.

The fact is that household debt levels are far too high and this prevents retail spending. With house prices in Sydney and Melbourne recovering, there will be no relief on that front and as we have pointed out in past updates, interest rate cuts crimp the spending power of savers while those with mortgages continue to maintain repayments to get ahead of their debt instead of spending the savings from the rate cut.

As Ross Gittins asked a couple of weeks ago, if the RBA continues to cut rates, in whose interest will it be acting, saying that it was “time for Reserve governor Dr Philip Lowe to stop doing more harm than good and turn the management of demand back to the people we elected to run the economy”.

Maybe the RBA should pay attention to more “qualitative” factors for guidance on how its policies are affecting the average person. A recent Roy Morgan web survey showed that 40% of Australians think 2020 will be ‘worse’ than 2019, the highest figure for nearly three decades.

Australia 'Better' or 'Worse' Chart

Those results, when compared with a Gallup International Association survey, had Australia as one of the least confident countries in the world about 2020. Our 12% “Next Year Better” was equal 43rd out of the 47 countries surveyed with only Italy, Jordan and Lebanon having lower responses!

Our 40% “Next Year Worse” result was number 7, with the six countries more negative being Lebanon, Hong Kong, Jordan, Italy, Bosnia-Herzegovina and Thailand.

Just think about that for a minute. Australians are up there with countries like Lebanon (in economic meltdown with cash withdrawal limits of $1,000 per week) and Hong Kong (democracy protests) in terms of pessimism. More the luckless country than the lucky country.

That survey is backed up by Digital Finance Analytics, which reported an all-time low household financial confidence index of 81.2 that they attribute to weak wages growth as the main underlying cause.

Digital Fiance Analytics Chart

Job security is also weighing down sentiment, as the chart above shows with more people feeling less secure in their job. Another pointer to what is driving that is the quality of jobs that are being generated. The chart below from job site indeed shows that “almost half of jobs created over the past year were part-time, with 40% of employment growth over the past 5-years part-time”.
 
Share of Employment Growth (%) Chart
 
Lower interest rates and the talk of Australian QE, we suggest, will not do anything to address this lack of confidence and it could be argued that such low rates and QE talk is sending a signal to Australians that things are bad and so be cautious. The complete opposite of what the RBA wants to achieve.

Central Banks will never admit to the adverse effects of easing monetary policy, but anyone can see them if they open their eyes. The latest rate cut cycle towards 0% has lead to massive asset price inflation, with housing prices and the ASX moving much higher, but that only benefits the wealthy portion of the population that already hold those assets (some may say ‘boomers’). The majority of the working age median income earners are simply struggling to pay off their inflated home loan and this will drag the economy down in the long run.

We would also argue the recent rate cut cycle is only going to exacerbate inequality in Australia as it has benefitted the “haves” at the expense of the “have nots”, but easing rates is the only tool the RBA has, and QE will do much of the same. Asset prices may rise further and the AUD will likely suffer, but the new wave of full-time workers simply turn into debt slaves with million-dollar housing loans.

The underlying economy will not have lasting long-term structural benefits from the result of manipulating interest rates as low as possible. Perhaps the goal of Central Banks is to get rates to zero before the next crisis in order to bring on the absurdity of negative interest rates as the ‘solution’.
 

Coronavirus

Into that shaky environment now comes the coronavirus. While it started out as a Chinese problem, the situation has accelerated with nine confirmed cases in Australia. On top of that is the direct impact to Australia from reduced Chinese tourism and a hit to our exports to them.

We won’t bother covering the coronavirus itself as we are sure you have already read about it elsewhere, and with it being such a dynamic situation, anything we write today will probably be out of date in a day. Let’s just hope the trajectory of the chart below does not continue at this rate for too long.

CoV Global Cases Chart

We would note that the coronavirus comes at a time when China’s economy is at a critical point and it may tip the balance to the downside.

Economic advisory GnS Economics said this month prior to the coronavirus becoming an issue that “the Chinese economy has reached or is very close to reaching the point of debt saturation” and “is actually a massive and vulnerable Ponzi-scheme waiting to collapse”.

There have been other vocal long-time Chinese bears, like Kyle Bass, but to-date China has failed to crash as predicted. It may be that the coronavirus is the straw that breaks the camel’s back.

If China breaks, others will follow as it is not just China that is at a critical point. Global debt levels reached a new all-time high of close to $253 trillion and 322% debt-to-GDP ratio (according to the  Institute of International Finance).

Global Debt Hits a Fresh Record of 322% of GDP Chart

At the same time, China’s bank assets as a percentage of global GDP has ballooned from a mere 9% in 2005 to a whopping 50% in 2018.

China Banking Assets to Global GDP Chart

As to protecting oneself for a global economic storm if this virus gets out of control, GnS Economics recommend “paying back as much debt as possible, accumulating sufficient cash reserves and, if practically possible, obtaining some physical gold”.

We aren’t sure why they added the “if practically possible” to that recommendation, as ABC Bullion tries to make buying physical gold as easy as practically possible.

As to how much is practical, venture capital firm Collaborative Fund suggests “putting extra padding around the risks you can see is one of the only ways to prepare for the risks you don’t see”. No better example of that than the coronavirus, which is a risk no one saw two weeks ago.

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at comms@abcbullion.com.au, or call us during trading hours on 1300 361 261.

Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.