The Big Short...

Christopher Joye

Coolabah Capital

In the AFR I write today about The Big Short (brief except only enclosed). Specifically, since late last year, we’ve had several contrarian views. First, US markets needed to price in the Federal Reserve lifting its cash rate to 2.5-3.0 per cent. At the time, markets were pricing in a tiny 1.5 per cent terminal Fed cash rate. They’ve now lifted that to around 2.9 per cent.

A second forecast was that the US 10-year government bond yield needed to rise above 3.2 per cent. Markets strongly disagreed, pricing in just a 1.3 per cent yield. Yet four months later, the US 10-year yield is now above 3 per cent.

A third expectation was that US equities would mean-revert back to normal, cyclically-adjusted, price/earnings multiples. This required a 30-60 per cent draw-down in US stocks. Since that time, the S&P500 has fallen about 14 per cent while the NASDAQ is off 24 per cent. We estimate that the S&P500 has another 20-35 per cent to go. The NASDAQ should fall much further.

A fourth view was that while Aussie house prices would continue climbing for a while, they would have to correct 15-25 per cent after the first 100 basis points of cash rate hikes, which we thought would commence in mid 2022. The Reserve Bank of Australia obliged this week with its first 25 basis point increase. It was a classically jejune Martin Place: doing the one thing nobody on the planet expected just to prove everyone wrong. Markets and economists thought no hike, 15 basis points, or 40 basis points were all possible. Desperate to claim a supercilious victory, the RBA lifted its target rate 25 basis points.

Kudos to columnist Terry McCrann for bravely calling early hikes ahead of everyone else, and to CBA’s Gareth Aird for generally being ahead of the curve.

The RBA’s governor, Phil Lowe, then gave an impressive press conference, where he delivered a mea culpa on the central bank’s woeful forecasting track-record, describing it as “embarrassing” and something that had to be fixed. This extremely rare bout of humility was way overdue, but nonetheless carried an enormous contradiction.

It is not just that the RBA’s forecasts have been pathetically poor. It is that the RBA has then lurched into huge, multi-year policy pre-commitments on the basis of these specious perspectives.

Recall the commitment to not raise rates until at least 2024. This was also accompanied by the promise to keep buying the 2024 government bond yield to ensure its yield remained equal to the 0.1 per cent cash rate. And, more recently, the pre-commitment to wait for the May and June wages data before hiking rates, ruling out a May move. All these de facto promises have been overturned, torching the RBA’s credibility.

Despite admitting that his economists could not forecast their next footstep, Lowe then repeatedly told the world that the RBA expected to lift its cash rate to a 2.5 per cent “neutral rate”. Over and over again. On what planet can the RBA have confidence in this expectation? Why even utter these words? What happened to just being data dependent?

All of this tells us is that the RBA has learnt absolutely nothing about the perils of pre-commitments. It demonstrates that it is not yet willing to concede defeat about its deep intellectual deficiencies. It cannot help but reflex into pretending to be an all-seeing, all-knowing diviner of our destinies.

The bad news is that the RBA has an especially distinguished track-record of getting the Aussie housing market's reactions to its cash rate changes horribly wrong. This is all the more surprising because the housing cycle is exceptionally easy to forecast.  

Read my full column over at the AFR here. If you want to read my Livewire expositions of both the Big US Equities Short and the Big Aussie Housing Short, click on those links.

Investment Disclaimer Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting Neither Coolabah Capital Investments Pty Ltd, EQT Responsible Entity Services Ltd (ACN 101 103 011), Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Institutional Investments Pty Ltd holds Australian Financial Services Licence No. 482238 and is an authorised representative #001277030 of EQT Responsible Entity Services Ltd that holds Australian Financial Services Licence No. 223271. Equity Trustees Ltd that holds Australian Financial Services Licence No. 240975. Forward-Looking Disclaimer This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.

Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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