Cost-of-living delays retirement plans + inflation worry

Hi everyone,

So much happening this week:

• Inflation makes a surprise (and worrying) tick upwards

• Construction industry woes continue

• Consumers continue to tighten their belts, particularly young families

• Cost of living forcing more older Australians to delay retirement

• Unemployment the canary in the economic coal mine

• Future global energy sources

• The big money being made by US tech companies

Inflation uptick means rates on hold for longer

A slight uptick in the all-important inflation rate in April to 0.7 per cent, driven by a bigger than expected rise in clothing and footwear plus health insurance premiums. In the year to April the CPI is up 3.6 per cent, which is above market expectation of 3.4 per cent.

Even though the first month of a quarter is always unpredictable, markets are now not expecting any rate cuts until well into next year. As you know, that’s something I’ve predicted for a while.

Apart from clothing and footwear, food inflation reflected the big lift in volatile fruit and veg prices. The Australian Bureau of Statistics (ABS) noted that unfavourable weather conditions played a role.

The bad news in property construction keeps getting worse

Property construction fell 2.9 per cent in the March quarter when analysts were expecting a 0.5 per cent lift in activity. That is a big miss.

A couple of weeks ago I showed a chart outlining the huge lift in construction costs and how it was better financially to buy an existing house than build one. Those high costs are now causing a big drop in construction activity.

Construction is a large employer and economic driver so a slowdown is something to be wary of.

Residential construction was down 1.2 per cent, which means that the chronic shortage of new properties is not going away and values will continue to be driven up.

To make matters even worse in the property construction sector, building approvals have dropped even further. Building approvals are the lead indicator of what is likely to be built over the next 2-3 years and hence be available for sale in around three years’ time.

According to seasonally adjusted build approvals figures released yesterday, the total number of dwellings approved fell 0.3 per cent in April from March. Approvals for private houses fell 1.6 per cent nationally.

Total dwelling approvals fell in Tasmania (-16.1 per cent), NSW (-4.5 per cent) and WA (-0.9 per cent). Rises were recorded in SA (13.9 per cent) and Queensland (5.0 per cent), while Victorian approvals were flat in April.

In trend terms (which smooth out seasonal data), total dwelling units approved have dropped 6.7 per cent from a year earlier, while private sector dwellings (excluding houses) have plummeted 27.6 per cent.

Australian consumers continue to watch every dollar

No wonder companies like JB Hi-Fi, Baby Bunting and Super Retail Group are warning investors of a slowdown in sales. April retail trade figures were really weak – up just 0.1 per cent for the month, or half what economists were expecting.

It follows a fall of 0.4 per cent in March, so there are absolutely no signs of a bounce back with shoppers opening their purses.

We have the 1 July tax cuts and the federal and some state government energy subsidies coming through in the next couple of weeks. However, all the consumer surveys are showing that money will be saved rather than spent. It will be used to pay down debt or build savings for emergencies.

By sales category food retailing (‑0.5 per cent) and clothing & footwear (‑0.7 per cent) fell in April. Department stores (0.1 per cent) and cafes, restaurants & takeaway (0.3 per cent) recorded modest lifts while other retailing (which includes other recreation goods, pharmaceuticals & cosmetics, newspapers & books) recorded a 1.6 per cent lift in April.

Over the past year other retailing has outperformed, rising by 4.7 per cent while food retailing and cafes, restaurants & takeaway have both risen by 2 per cent, which is well below the inflation rate. While costs are going up real sales are falling.

That’s why you’re seeing lots of media stories about shops, cafes, restaurants and pubs all closing down.

Even spending on essentials like food is slower than the pace of population growth. This is backed up by commentary from retailers suggesting households are trading down brands and food options. All other categories have recorded falls: department stores (‑1.3 per cent), clothing (‑2.5 per cent) and household goods (‑1.3 per cent).

On a state-by-state basis, NSW (0.7 per cent) and SA (0.5 per cent) recorded gains while Vic (‑0.4 per cent) and Qld (‑0.2 per cent) fell. WA and Tas recorded no growth in the month. Over the past year the large states of NSW and Vic have underperformed compared to the other states.

Look at this chart - the annual retail sales growth is currently at the lowest rate in 40 years. Yep, 40 years.

I reckon this CommBank iQ chart really sums up where the big cuts are coming from. And that’s families going through that high expense period of raising children and buying a house.

The over 60-year-olds are the only consumers increasing their spending by more than the inflation rate. The 25–35-year-olds are cutting spending outright, while other age groups have increased their spending by less that inflation.

Boomers are delaying retirement because of the cost of living

The intergenerational war has never been more heated as the Baby Boomer generation are accused of everything from inflating house prices, increasing inflation and living a privileged lifestyle they supposedly don’t deserve.

And the accusers are their own adult children.

Just for a bit of perspective, 47 per cent of 55–64-year-olds still have a mortgage and 15 per cent of 65–74-year-olds… even 5.4 per cent of those over 75 have a mortgage. So oldies are also being hit by higher loan repayments.

And this week Equip Super found only 26 per cent of Australian workers aim to retire at the age of 65. Those planning to retire later are delaying retirement by an average of six years, meaning many are choosing to work into their 70s.

More than a third of working Australians are planning on delaying retirement due to the rising cost of living. It illustrates the financial strain felt by households nationwide due to increased economic pressures and rising living costs.

The research also found that 85 per cent of Australians are becoming more cautious about their spending. 

Unemployment is the canary in the economic coal mine

While everyone is fixated on inflation as a precursor to interest rate cuts, I’m fixated on unemployment. History tells us that when economies weaken, unemployment rises relatively slowly. There is always a lag, but then it hits a tipping point.

When that tipping point comes the unemployment rate rises rapidly and surprises everyone. From the Telstra layoffs to profit warnings from retailers to the number of cafes and pubs closing their doors, there just seems to be a lot of anecdotal evidence of job losses which don’t seem to be reflected in the official statistics.

This IFM Investors chart shows the unemployment level at the moment and the Federal Budget forecasts made in May 2023 and then this month.

All eyes will be on the June unemployment figures to see whether that spike up in May (above this month’s Budget forecast) continues to rise sharply or be smoothed as expected in the forecasts.

An important part of the Reserve Bank’s charter is full employment. Yes, inflation is part of that charter, but so is unemployment.

I’ve always said, if unemployment gets above 4.5 per cent quickly, then the RBA could be forced into rate cuts to stimulate the economy and create jobs.

We need immigration… the balance just needs to be right

I’ll be honest, I hate the politics of immigration and the hate it can create. Apart from our First Nations peoples we are a country built on migrants. Mine arrived in South Australia in 1843 from Germany and from Wales in the 1920s.

First up, just a reminder of why we’re the most multicultural country in the world.

Economies (and therefore our lifestyles) are driven by population growth and age. Just look at Japan, and now China, as their population ages, they run out of workers and taxpayers and their economies slump.

Just a couple of years ago everyone was forecasting when the Chinese economy would overtake the US economy in size. Not anymore. The collapse of their property industry and the lack of new workers means China is unlikely to ever have a bigger economy than the US.

Labour shortages in any economy are driven by the age of the workforce and new workers emerging. Just a look at our natural population growth.

It’s interesting that the first of the 2005 Baby Bonus babies start coming into the workforce around now. The bonus provided a short-term bump to the birth rate, but it’s been on the slide ever since.

We currently have the lowest birth rate since I was born… and let me tell you that’s a long time ago. If we depended solely on our birth rate the eventual outcome is that we’d run out of workers, like Japan and China are doing.

The solution is bringing in migrant workers to fill jobs, lower our average population age and provide future taxpayers. But you have to bring in the right type of migrants, plan for their arrival in terms of infrastructure and then welcome them with opportunities.

As you can see, despite all the political debate, our immigration levels have rebounded to pre-pandemic levels but certainly haven’t made up for the losses during the pandemic. The issue isn’t that we have too many migrants coming to this country – we need them.

The issue is that governments haven’t planned for them and built the housing or infrastructure needed to cope with their arrival.

The future of global energy sources

Investing in energy stocks is currently a popular theme among fund managers, stockbrokers and investors. There is great debate on the relative merits of nuclear, coal, oil, gas and renewables.

The world is hungry for power, but there is also the delicate balance of generating that energy in a way that doesn’t add to the carbon footprint and impact emissions targets.

That balance is made even more delicate when the transition to renewable energy takes time. During that period a base load power needs to be maintained to stop blackouts. So what are the energy sources we’re going to rely on over the next 25 years?

This chart from the International Energy Agency gives a pretty clear picture on where the energy supply will come from.

Coal is the dirtiest of the energy inputs and the International Energy Agency is forecasting a 40 per cent drop in its usage over the next 25 years. That has consequences for our coal miners like Whitehaven and New Hope. But remember, there are virtually no new coal mines coming on stream in the future, so that drop in demand for coal could be matched by a similar drop in supply.

The supply of oil and gas will remain largely at current levels while supply of nuclear will grow strongly off a low current base. That’s why uranium shares have been doing so well lately.

Wind & solar is the star performer when it comes to energy supply, again, off a very low base. This forecast seems to justify the Federal Government’s plan to develop a much stronger solar industry in Australia.

The bull market is being driven by major US tech stocks

Everyone is still talking about the incredible so-called ‘Magnificent Seven’ technology stocks on the US sharemarket and how they alone are driving the performance of the entire market.

Those seven stocks are Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Meta Platforms (Facebook and Instagram) and Tesla.

Look at this: the top 10 companies (which includes the Magnificent Seven) now account for 35 per cent of the value of all 500 stocks in the S&P 500 index.

This isn’t a bubble like the “dot com” bubble of the late 1990s; these big technology companies are producing the profits to justify their valuations.

Last week, the AI computer chip maker Nvidia announced a strong quarterly profit result underpinned by gross profit margins of 78 per cent. 

The company is outpacing Apple, Amazon, Alphabet and Microsoft in the profit margin department. Only Meta posted higher margins in its latest quarter, at nearly 82 per cent. 

Here’s the gross profit margin breakdown:

Meta: 81.8%
Nvidia: 78.4%
Microsoft: 70.1%
Alphabet: 58.3%
Amazon: 49.3%
Apple: 46.6%
Tesla: 17.4%

Nvidia alone is now worth more than the entire value of all stocks listed on the Australian Stock Exchange.