Behind the Wall Street gyrations is an uncertainty that goes well beyond the ‘will they or won’t they’ speculations on Federal Reserve interest rate intentions.
Because we have encountered many market and corporate turmoils, Australians often develop a sixth sense to looming danger and so today let me isolate three US alerts that we need to watch.
A major entrepreneur is looking overextended; there are signs that the actual downturn in the US economy is more severe than the official labour figures are showing; and buried in the mass of US material is a vast hidden loss.
Over the last six decades Australia has seen a large number of corporate crashes and they tend to follow a pattern.
I suddenly realised the parallels after watching the wonderful film on Alan Bond’s remarkable 1983 America’s Cup win. The film was inspiring but it did not spell out the detail of what happened after Alan Bond became a hero when Australia Two won the seventh race.
Australia was seen as an exciting place to invest and Alan Bond was the gateway. US banks scrambled over each other to get on the Bond bandwagon and lend him money.
Suddenly he was able to expand his empire which soon covered gold mines, television stations, Chiffley tower in Sydney and breweries. He was hopelessly overextended with high debt levels and stretched management skills.
It was all perfectly legal but incredibly dangerous. Bondy later got into trouble because, when faced with disaster, he did silly things to try and save his empire which caused him to break the law, but that’s another story.
There is a similarity between US hero Elon Musk and many Australian boomtime entrepreneurs like Alan Bond.
Elon Musk became a well deserved US corporate hero as he emerged as a world leader in batteries and electric cars way ahead of his rivals. His Tesla shares open the 2022 year around $US400.
Americans saw Musk as a corporate leader who was thinking well into the future and would outmanoeuvre the existing American establishment.
Banks and investors all wanted to get on to the Musk bandwagon. Now people are having second thoughts.
Over the weekend Tesla shares fell six per cent to $US223, taking it down a thumping 45 per cent in the year. The market senses danger.
As well as Tesla, Musk is a major shareholder in the SpaceX business and now is about to buy Twitter. These massive expansionary thrusts are taking place at a time of rising interest rates. At the same time motor makers around the world including Ford, General Motors and Mercedes are now looking to challenge Musk. The great danger for Musk is that his talents will be spread too thin and his debts too high especially, as like cars, batteries and social media are becoming more competitive.
Musk has great talents and may get through, but he is no longer an unchallenged share market hero. If he begins to struggle with debt Australian precedents show that markets will put pressure on other high profile US entrepreneurs. Wall Street needs Musk to keep winning.
At the moment US markets are focusing on the US labour and inflation figures which are lag indicators. An up to date indicator are the messages from Chinese goods and service providers who are reporting to Australians that there has been a noticeable decline in US demand and, as a result, goods are freely available to Australians.
And there is also a hidden set of losses that nobody is owning up to. Institutions have bought about $US10 trillion in mortgage bonds which are an essential part of the home funding market. For ordinary Americans it is a far better home funding system than is available in Australia because it enables homeowners to lock in low rates and refinance when interest rates are falling.
Accordingly, unlike Australia, in the US the high interest rates are not impacting the cash of Americans who own a home but are impacting new loans and the prices of dwellings plus the level of building activity. Behind that consumer attractive system are US institutions who hold mortgage bonds.
These bonds have been structured in such a way that when interest rates are stable there are good returns When rates are falling the bonds yield spectacular profits. But on the flip side rising interest rates cause very large losses and those losses are sitting on institutional books. They are going to make future home finance tighter and impact the building industry. They may also jeopardise institutional solvency.
But it’s all unknown and kept under wraps.
These three situations may resolve themselves but in Australia, when such a pattern emerges, it’s normally accompanied by nasty events
But there is a big difference. When our economy gets into trouble the world simply smiles and says it’s those Aussies doing silly things again.
But when such things happen in the US it impacts the entire global community.
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