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8 Jul 2022 - Hedge Clippings |08 July 2022



Hedge Clippings | Friday, 08 July 2022

It's disappointing when a source of Hedge Clippings' inspiration (to use the word lightly) departs from centre stage, although sometimes with mixed feelings. Take former POTUS "The Donald" for instance: A prime candidate (and narcissist) if ever there was one, who was regularly mentioned in these paragraphs, but who we were happy to see the back of - albeit that he's threatening to make a comeback in 2024. This week, it seems another of Hedge Clipping's favourite targets, Boris "Bozo" Johnson, looks to be headed for the EXIT sign, both from Downing Street, and thus the pages of our weekly musings.

Donald Trump is still convinced he was robbed in the November 2020 US presidential election, such that he thought if he said it loudly enough, and often enough, he would stay in the White House for another 4 years. As a BBC commentator noted this morning, having two such leaders at the same time, both of whom were seemingly devoid of the ability to focus on detail or tell the truth, made the world a more interesting place. Unfortunately, being interesting isn't the most important credential for a President or Prime Minister, particularly in troubled times. While Australia's past penchant for regular and rapid prime ministerial turnover was the subject of much incredulity (and mirth) in both the UK and US, we do at least have an effective exit system, either via the ballot box, or the knife behind one's colleagues' back.

David Cameron, Boris's fellow ex Etonian and himself a former resident of 10 Downing Street, once described the scruffily charismatic ex PM (in waiting) as a "greased piglet," owing to his ability to slip (or lie) his way out of tight situations. Even as he's on the way out, it looks as if he's going to hang around as interim PM for long enough to hold his wedding reception at Chequers on July 30th. Maybe that was in the back of his mind as he steadfastly refused to accept the inevitable, such that it took 60 or so of his colleagues to resign in protest.

Sadly, while his handling of multiple crises, such as COVID, parties at Number 10 during lockdown, and dealing leniently with the truth, were eventually his undoing, the always unconventional Boris also pulled off some amazing achievements. BREXIT (like it or not), and his leadership in supporting Ukraine were significant. His departure, at least the timing of it, will leave a dangerous void that Putin will no doubt attempt to capitalise on.

Leaving politics aside, this week saw the RBA follow market expectations by lifting the official interest rate by 50 basis points to 1.35% in an effort to curb consumer consumption, and in turn inflation. The RBA's post meeting statement expects inflation to peak later this year before declining back towards the 2-3% range next year, and that "the Board expects to take further steps in the normalisation of monetary conditions in Australia over the months ahead". That signals a further 2 or 3 moves over the next 3-6 months towards 2.5%. Whilst the current 1.35% is low by historical standards, as is the expectation of 2.5 or 3%, that's going to bite, and bite hard given the level of household debt, particularly hitting the property market.

While the RBA points to unemployment at 3.9% and a resilient economy, they also point out their uncertainty over the outlook for household spending, which will be impacted by consumer confidence. Once that confidence evaporates - and there's anecdotal evidence that is already happening - then part of the RBA's job is done. The danger is they've done it too well, and getting confidence back will be the new challenge.

In the US expectations are for a further 75 bps rate hike in July, with the Fed indicating that taming inflation is their priority, even at the risk of recession. If so, that will certainly break confidence.

Following a brutal June in which the ASX200 fell 8.77%, and the S&P500 by 8.25%, equity markets seem to have settled somewhat. The forthcoming reporting season will give a better idea of earnings, and therefore if valuations are considered reasonable, or prices have further to fall.

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