The S&P/ASX200 hit a new record this week of 8150.5 points, yet there was very little fanfare. The story is well known. Tech stocks like WiseTech Global and the big four banks, led by Westpac and Commonwealth Bank, have driven the market higher on hopes that interest rates will fall. Resource companies like BHP, Fortescue Metals Group, Rio Tinto and Woodside have been the handbrakes, in large part due to the slowdown in China. What surprised this week is how little fanfare was made of the new record. After the October 2007 crash, it took 12 years for the bourse to reclaim what it lost. This year it has hit a new high several times. If you put a trend line through the ASX, it has been steadily rising ever since 2010. The COVID slump of March 2020 was regained in 13 months and the upwards trend continued. At more than 8,000 points, the market is over-valued, at least based on the trend line. That doesn't augur well for trading for the rest of this year, particularly if bond markets are correct when they price in a recession. At some point the banks, particularly Commonwealth Bank, will stop rising. It's the same deal with the tech stocks. It is going to be a rocky few months for the sharemarket.
2. Airfare hikes shows competition works
Since Regional Express went into administration and stopped flying Brisbane-Sydney-Melbourne routes, airfares domestically have increased 12 per cent. If ever you wanted a case study of competition working, here it is. The problem for Rex and for passengers is that the regional airline's business model wasn't sustainable. Same deal for Bonza, the airline that went broke earlier in the year. Figures from the Bureau of Infrastructure, Transport and Regional Economics for September show that the cheapest airfares are up 12.5 per cent since July, and full-priced tickets are 12.3 per cent more expensive. Business class airfares are relatively stable over recent months but are 12 per cent higher than a year ago. However, airfares are still below the long term average. While full price airfares might be at their highest level in three years, they are still at 93.6 per cent of the long term average. The best discount airfares are at 70 per cent of the long term average. The good news for travellers heading overseas is that competition continues to ramp up. Air India is talking about boosting its flights to and from Australia. Qatar Airways has a sale on to celebrate 15 years in Australia. Qantas discounted some flights to Asia over the past week. It seems that finally the airfare market, totally disrupted by COVID, is settling into a more normal pattern of behaviour. There are always deals if you look hard enough but generally the news is better for overseas travellers and worse for domestic flights.
3. The work-from-home revolution is taking a break
So many of us said with such certainty during the COVID pandemic, that the work-from-home revolution had arrived and people wouldn't ever again have to work five days from the office. Alas, we were wrong. This week Amazon said it wants its one million-plus employees back in the office, five days a week from next year. Tabcorp told its Aussie employees it wants them back at their desks. Many employers, including governments, want employees in the office three days a week. The latest ABS statistics are dated - August last year - but it shows that 37 per cent of Australians work from home regularly. While it is still five percentage points above the pre-pandemic level, the trend is down. Is the WFH revolution over? I'm afraid so, for now. I suspect what will drive many people back to the office isn't culture, but fear. Fear of losing their job if they aren't seen to be part of the workforce. Fear of not getting a promotion or a pay rise. Fear of someone more junior leapfrogging them in the pecking order. It has not been relevant so far because of full employment. But that will change as the unemployment rate rises. Today, most people who want a job can get one. In 2025, it won't be the case, and that's when fear will kick in.
This is a story about the natural optimism of an equities trader, and the innate pessimism of bond dealers. Okay, it is much too big a generalisation but in terms of track records, bond traders have a better history of picking booms and busts, and at the moment they are calling a recession. The yield curve tracks yields on bonds of similar credit quality, but different maturity dates. Medium term bond yields, such as two year yields, have fallen sharply, particularly in the United States. This suggests that bond traders think the Federal Reserve will have to cut interest rates deeply in the next couple of years, which in turn reflects deep pessimism about the economic outlook. And with the price of oil hovering around three year lows, commodity traders appear to support the bond traders. Equity traders are at the other end of the spectrum. Wall Street hit a new high this week, as did the S&P/ASX200. Equity traders agree that interest rates will fall, but they view that as good for corporate earnings. Lower rates will boost consumer spending and business investment. The notion of a recession, to equity traders, is like an ugly shadow in the background. Should we trust the natural exuberance of equities traders or the dismal view of bond traders? It's a good question.
5. IR laws ain't changing, no matter what business says
Politics is topsy-turvy in Australia at the moment with Labor fighting the CFMEU and other unions, and the Coalition at odds with big business in a number of policy areas, such as forced divestment. But when it comes to labour relations, arguably the core, long-standing difference between the two sides of politics, things haven't changed. Last night the Prime Minister Anthony Albanese made it clear that industrial relations reforms introduced by this government are here for the long term. Miners, manufacturers and other business groups claim the new laws are anti-competitive, which ultimately will be inflationary. 'Right to disconnect' laws are impractical and 'same job, same pay' rules are expensive and unfair. The government says the changes this year promote job security, gender equality and equal remuneration. While the Albanese government has done a commendable job in taking on problems in the health and aged care sectors, and the NDIS, it has mucked up labour relations. Forcing uniform pay rates and changes in workplace arrangements will slow the economy, not speed it up. As we head to the election that needs to be held by May next year, labour relations will take centre stage in the political debate. And on this one, the government has it wrong.
BEST OF THE WEEK
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Every Wednesday we release How Do They Afford That, a personal finance podcast focused on making your money work harder for you. In this episode, Roger Montgomery joined the show with a guide to investing for each generation: Gen Z, Millennials, Gen X, Baby Boomers.
"What are the factors that affect the strength of the Aussie dollar? In particular, how do I get more bang for my buck when I'm exchanging currency to travel overseas?"
AND ONE LAST THING...
Remember when that dress went viral a few years ago, with half the population seeing white and gold, and the other half seeing blue and black? We may see colours differently to other people... and now there's a viral online test for how you see certain colours compared to the rest of the population.
If you want to read more about it, The Guardian does a great job of describing the science behind it. But if you just want to take the test (and 1.5 million people have already done it), then get clicking here.
