I apologise in advance as this is a longer read than usual but there is quite a bit going on so I wanted to go into a little more depth than usual.

Made famous by ‘Chicken Little’, and his concern that the sky was falling, you don’t have to look far to get worried.

We can list some majors pretty easily…

  • In Victoria the pandemic is ‘raging’;
  • NSW seems to be the new emerging hot spot;
  • Around the world, there are over 250,000 plus new Covid19 cases being discovered every day and the daily death rate is well over 6000.  July 22nd it was 7,121;
  • Japan is going through a second wave as well;
  • Announced on Thursday 23rd July, 19_20 Federal government deficit will be $85.8 bill.
  • 20_21 Federal Government debt is forecast (stop laughing – yep still forecasting) to be $184.5 billion.
    • If you add that and this years’ deficit to existing debt at March 2020 ($573.1 bill) and it could be $843.4 billion.
  • Our states finances are worse than the Federal Governments with Victoria and Queensland in fairly diabolical shape and that was the case before the virus.  State revenues through GST may have fallen off a cliff and stamp duties on property sales would be well down;
  • We have an increasingly aggressive authoritarian regime in China that is in the process of absorbing Hong Kong and still wants to lay claim to Taiwan as well as most of the South Pacific.
  • Even without military conflict, we have ongoing trade conflicts between the US and China;
  • The UK is yet to negotiate a trade agreement with the European Union;
  • Seemingly, the biggest debate in the US presidential election is who is the most mentally incapacitated so that can’t be good;
  • Iran and Russia have been suspiciously quiet though the Saudi’s and Iranians are having their own little cold war tussle on nuclear armaments;
  • Boris Johnson had a haircut – Ok, old news (July 6) but that must have been a tough decision for him, though cheered by every hairdresser in the world. Now if we can just stop the orange guy from getting a spray tan!

The thing with problems is that they are very visible – the media, loves to report on them and to be fair, we consumers, seem to like reading about them. If you want to find positives you have to do the work and sift through a lot of hyperbole.  It very much feels like swimming against the tide.

Let’s look at the budget 

It ended up being -$85.8 billion for 19_20.  Wow, when was the last time we saw something as horrific as that?

  • Deficits between 2014 and 2017 were:
    • 2014    -$62.4bill
    • 2015    -$49.3bill
    • 2016    -$51.7 bill and
    • 2017    -$80.57 bill.  Hmm, how did we forget that  (Cumulatively -$243.97 bill)
  • Yes we were finally seeing it ‘back in black’ but at least we didn’t start the financial year forecasting a $60 bill deficit and then have Covid add $90 bill on top of that. We started the year with a forecast surplus of $4 bill so fiscal prudence in 2018 and 2019 was a very good thing.
  • 20_21 is looking like a mountain but I am a little sceptical on a few of the assumptions and yes, it could be understated as well.
    • Treasury forecast the Iron Ore price to average $55.  It is over $110 currently.  WA and Australia make a lot of money out of Iron Ore.  The argument is that Brazil will come back on line and that will put competitive pressure on Australia’s exports.  Our biggest customer is China.
      • Brazil coming back on line is a reasonable assumption but we are already more efficient than Brazil so arguably unlikely to see a price war while Brazil tries to recoup lost revenues.
    • China and Australia have real trade and geopolitical tensions but China is back in production and needs our Iron Ore until it can find a reliable alternative.  That may happen but you don’t build a mine overnight, set up supply chains and compete on price, quickly. 

The Unemployment rate

The unemployment numbers are making a lot of press. 7.1% for May and 7.4% for June. Now back in early June when the 7.1% number came out, there were any number of commentators arguing that number was a massive understatement and because of Job Keeper that was justifiable.  However, the assumption was that everyone on Job Keeper was not working. 

  • That may have been the case in hospitality and retail, and arguably still is in Victoria with its renewed lock downs, but in many cases these workers are still working. Employers are just being subsidised by the federal government to help them through the shutdown.

The commentators were very excited to announce 69,300 jobs lost in June!  Sort of ignored overall jobs increased by 210,800 (part-time employment increased by 249,000 but full time dropped by 38,100).

The participation rate (now 64%) also picked up, with a 1.3% increase in people looking for jobs hence the increase in unemployment.  Both the underemployment and underutilisation rate (the rate of people looking for more hours) dropped so more people are working and getting the hours they want.  In fact, all states and territories, except NT, recorded an increase in employment during the month.

Looking at business’s that have Job Keeper

A lot of non-small business people may not be aware that once you qualified for Job Keeper in one month, you then keep it no matter what your business does from there.  It came down to comparing a month this year to a month last year.  For example if your May 2020 revenue was 30% less than your May 2019 revenue, you qualified.  If your June 2020 revenue was then 110% of June 2019, it doesn’t matter, the federal government still pays you Job Keeper.  A 30% loss of revenue is a big hit in a month and we have clients who really need this to keep staff and their business going.  This is not about them. It is recognising that many businesses that have qualified, could arguably do without the job keeper now. 

While things can change quickly same numbers indicate quite a few industries are having a “V” shaped recovery.  That is, a rapid dip and then a recovery back to pre-Covid numbers.

  • Car sales had a record month in June.  There was probably some pent up demand from April and May, and the $56,000 instant tax write off would have helped, but if you are in serious financial distress a new car would not usually be your first priority. New car sales surge June 2020 
    • A big portion of this looks like commercial vehicles favoured by Trades which would indicate the building sector, which is one of our biggest employers, is managing their way through this reasonably well.
  • Real Estate.   New house sales in June were simply huge.  Yes prices have dropped and March, April and May sales were very low but the attached graph tells its own story.    New Home Sales Australia June 2020

o    This should help state budgets bottom line and is also an indicator consumer confidence in their employment and businesses is returning.

o    Good news but a note of warning as the ‘second wave’ concern could dampen this enthusiasm and we can expect fluctuations while we do not have a vaccine.

  • Australian retail sales rose 8.2% compared to June 2019 (Global goods demand has completely recovered from its collapse in March and April).  Similar to cars, there was pent up demand and the federal governments Job Seeker and Job Keeper payments have been providing a lot of stimulus. This may soften in July and August but still a good indicator of sentiment and the consumers’ willingness to return to business as usual as quickly as possible. The link below gives a lot of real information on what is happening and while restaurants, clothing and footwear are below June 2019 levels, household goods remain strong. Retail Sales Australia 2nd Qtr
  • Our farmers.  The drought has broken.  Not all good news as export demand is uncertain with our major trading partners dealing with Covid19 but they’re not going backwards and increasing production after three very tough years.  Increased production is great when you have lots of demand but actually drives prices down when you have softer markets. Our beef farmers are pretty happy though. Australian Agriculture Overview

Many businesses that qualified for Job Keeper, would no longer be able to justify it if they had to qualify each month and that is a good thing.

There is a lot more I could discuss but the message I am trying to get across is that a big government deficit assumes that we continue a lot of the current arrangements past December.  The sceptical side of me thinks that the current number is deliberately overstated so that we go into the next election with a ‘pleasant’ surprise. 

Some other good news that isn’t getting a lot of press.


Tina Ross, one of our retired advisers, now living in the US (and dreaming of coming home) sent through this link, which is worth perusing. 


27 Vaccines are in human trials and Moderna, and Biontech are already at 27 July 2020 in Phase III testing.  The vaccine from UQ, while having potential, is a long way behind these options as far as the process.  Phase III is where the efficacy trials go from a small human group to a much larger sample in the thousands. The next step for these is approval.  Quite likely, there will be failures as the FDA sets a hurdle that the vaccine will need to protect at least 50% of the vaccinated but definitely progress.

The next best options are coming out of London and Japan but are still at Phase II.

Why have Markets shown a lot of resilience lately?

Because of all the above and reduced ‘uncertainty’, even with the issues in Victoria, I would suspect that most Australians have an opinion on how this will run.  As long as we stop the spread from hotel quarantine, we isolate community cases and stop them spreading the virus.  Eventually numbers will come back down and we get back to the numbers that the community is comfortable with.

There is a lot of concern about NSW but by all accounts they are doing a great job of tracing any new outbreaks and yes, Victorian travellers may have contributed to their cases so back to hotel quarantine.

In Australia, we have done over 4 million tests (population of 25.5 mil), discovered 15,325 cases and seen 167 deaths attributed to Covid19 (data at 28 July 2020).  89% of the deaths have happened in adults over the age of 70.  No-one under 40, (according to the stats) has died from this virus in Australia and cases where healthy people under 70 die from this virus seem very rare, though we don’t get a lot of detail. We have 50 serious or critical cases in Australia at the moment. Many that have recovered from the infection have probably suffered some lung damage so still not a good thing but a long way from the Spanish Flu.

The science is that you can’t eradicate a virus until you have a vaccine so until then, we will continue to see flare ups.

I would say investment markets are cautiously positive and that is probably justified, not just here, but all around the world.  In the Company reporting season in the United States, of those who have reported, 81% plus surprised positively.  Still down but not as bad as they predicted.

Things are by no means rosy and we still have a recovery process to go but we are steadily getting a better understanding of our environment.

We still have big geopolitical issues that could significantly impact us and the world so we are in no way complacent and continue to look to reduce risk and protect downside where we can.  The alternative, that politics settles down and China edges away from aggression in light of large western democracies unifying against them, is also a reasonable probability, in which case markets and growth assets continue to recover.

We all vote for the latter!