Monthly chartathon

The Reserve Bank released its latest Chart Pack yesterday. As a technical analyst/chartist, I prefer a visual representation of data and have always found this series of charts fascinating. The whole pack can be downloaded here (1.28 mB or so) or viewed by section here.

Although it covers many areas, I’m going to look at 3 sections: interest rates, inflation and GDP.

Interest Rates

The main (only?) focus of the commentators regarding the RBA is the Cash Rate, which is determined at the monthly meetings. The graph below shows the published cash rate (in red) and the real cash rate (adjusted by CPI and in blue).

For all the wailing about mortgage rates (which are still determined by the cash rate), it is clearly evident that rates are still at near-historic lows. More importantly, adjusted for CPI, the real cash rate is extremely low – not even 3% – not exactly a tight monetary policy.

This chart shows three things: first, contrary to popular opinion, the current cash rate is very low; secondly apart from the too slow response of the early 2000’s RBA rate rises, it is at a 20 year low and thirdly, the trendline in the real cash rate points to a low inflation, possible deflation trajectory (light blue line).

You could take this one of two ways: either the obvious stress in the housing market is pointing to a much lower threshold for pain amongst households with historically high debt levels or we’ve become a bunch of serious whingers.

Next, let’s look at bond yields which reflect the low interest rate environment – starting with the Aussie 10 year.


A quick glance shows that the average bond yield oscillates between 5 and 6 percent over the last 15 years or so. A longer glances shows how the bond yield rose (as bond prices dropped) when the 2004-2007 stock market bubble floated higher (more money went to stocks, hence bonds were bid down, yields then go up).

A second look since mid 2009 explains why the ASX200 stock market is now in a funk – bond yields are falling – testing the 5% level – which means, as during the GFC, insitutions are moving (and hence bidding up) away from stocks to Aussie bonds.

This is likely to continue as the realisation spreads that we are in for a bear market in stocks for a considerable period.

A race to the bottom
But what about 10 year government bond yields elsewhere? Well in the US, Germany and even emerging markets, there is a race to the bottom, to join Japan which is already there.


Now, some would say that high bond yields are reflective of a nation with poor monetary policy (e.g Greece, Ireland) or a history of default (e.g Latin America). What is clearly evident is that emerging and the developed world bond yields are converging, with average yields below 6%. This is reflective of a huge move towards government debt as an asset class over the last 30 years, as most nations have private and public pension schemes and finances that rely upon a liquid and growing government debt market.

The question is – is this a bond bubble? According to PIMCO, the world’s largest bond investor, the US market certainly is. The paradox is that government bonds – in almost any country – barely provide a real yield after inflation, but what else provides stable, albeit pathetic returns?

RBA has controlled inflation?
Now about that inflation – the measured CPI rate is wildly volatile – not exactly the hallmark of a well regulated monetary system. Notice the broadening triangle pattern since 1999 after moving out of a low inflation era.


Some of this blame should rest squarely on the shoulders of the ABS, with their inadequate and untimely CPI data and hedonic construction. It is not clear what direction CPI is likely to go in future years, although recent bullhawkian panic surrounding its rise above its average of 3% is possibly correct in the short term. Note that on the quarterly histogram that every large push is succeeded by a significant calming thereafter (h/t Ben)

GDP Growth
I’m going to leave the best ’till last. I remember fondly my last meeting at the boutique financial planning firm with all the advisers and planners present. I made the call, based on my analysis of productivity, inflation (real purchasing power, not CPI) and profit growth of listed companies, that Australia’s GDP growth potential will be limited to, as Kevin Rudd likes to put it “growth with a 2 in front of it”. To say that least, I was rebuffed by those who though GDP would continue to rise at nominal 7-10% or real 3-5% forever and a day.


My version of the RBA Chart shows a deceleration in overall GDP growth – looking through the volatility, the trend is quite obvious. GDP growth – the hallmark of our democratic capitalist system, is visibly slowing down. Is this due to the ever decreasing incremental return on rising debt, without an increase in productivity? I’ll leave the detailed analysis to other bloggers here on MacroBusiness, but I’ll finish by looking at the visual effect of the mining boom – or FutureBoom!


Employment in the mining sector represents less than 2% of total employment – having more than doubled in the last decade. Notice how manufacturing in terms of employment distribution and growth – more than 4 times the size of mining – has gone nowhere in over 20 years.


The much bally-hooed capital expenditure by the mining industry is clearly evident – well, the change is, rising exponentially since 2001 (left hand chart). What is interesting is the context – mining CAPEX is currently half that of all non-mining, although it is forecast to rise significantly in the coming years, bringing on significant supply at the same time as commodity prices sky rocket.


I wonder what the internal rate of return (IRR – a measure of the productivity on capital investment) would be on these massive projects if these prices come off the boil?

Summary
Now I’ve probably provided too much of a bearish interpretation of these charts – Acarrlytes will obviously point to how Australia has weathered the GFC fine, and in comparison to other advanced economies, employment is near full and our Asian partners are doing magnificiently. So in closing, as I show some charts that show exactly that premise, I’d like to hear your thoughts and interpretation.


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Comments

  1. Outsidetrader

    Some nice chart – with good analysis as always. On the first chart (real cash rate) while this is at a very low level, it would be interesting to see how close we are to historical lows when you look at the rates actually paid by mortgagees (with the spread between the cash rate and bank lending rates rising considerably since the GFC). My understanding is that the widening of this spread in part explains why the RBA has not raised the cash rate further.

    • Thanks outside.

      I’ve edited the first chart and added a very simple trendline to the real (adjusted for CPI, not inflation) cash rate.

      This possibly points to low cash rates in the years ahead, but again this is just a straight line analysis, although the weigh of debt is clearly weighing on the domestic economy if even a 25 basis point rise from the RBA gets all the Business Hysteria pundits up in shackles…..

      • “I wonder what the internal rate of return (IRR – a measure of the productivity on capital investment) would be on these massive projects if these prices come off the boil?”

        I suspect it will be ok for LNG where about half (or more of the slated capex is happening) given LNG prices aren’t in orbit like everything else. People will still want the lights to go on when they flick the switch in their homes long after the price of copper, coking coal and iron ore succumb to gravity.

        Having just said that, the flow through effects of LNG inverstment in the wider economy are likely to be far less than what Treasury, RBA and govt. are estimating or more likely hoping for.

  2. Four times as many voters employed in manufacturing as mining.

    Plenty of voters employed in property services.

    A fair chunk of builder voters still employed in commercial and residential real estate.

    Lets guesstimate 30% of voters working in declining sectors, less than 10% of voters working in mining and related sectors.

    Only a foolish politician wouldn’t be aware of this.

    • I think that a majority of voters across the board believe the meme that half of Australia’s jobs are created by mining though Lorax. That widespread, pre-conceived notion is what made it so ridiculously easy for the mining companies to turn public opinion against the RSPT.

    • “Only a foolish politician wouldn’t be aware of this.”

      In that case, should remain a well kept secret!

      But you’re right on one thing -politicians will have both eyes fixed firmly on re-election and will become concerned if conditions deteriorate in some sectors, as Treasury both forecasts and concedes is inevitable (do the pollies not read Treasury papers?).

      As you know, some say this is the price we have to pay to achieve The Great Transition – the opportunities presented by the resources boom being of overwhelming economic importance. Problem is not many understand just what this importance is (seeing it as little more than jobs or only in terms of their personal situation). Here is a pretty good place to start:

      http://macrobusiness.com.au/2011/06/relative-optimism/

      It is becoming even more important that the current 2speed situation is well understood – by the politicians, journalists and the ordinary Joe. All attempts to turn it into a simplistic ‘them and us’ situation must be resisted. This will actually require some intelligent processing of the facts and an understanding that we are in uniquely challenging times – domestically and globally. I hope we’re up to it.

      Anyway, thus far, economic conditions in the non-resources sector whilst soft, remain relatively stable. The RBA got the rate decision right. If Treasury are correct, there will be fallout. The next few months will tell. No-one yet has come up with an alternative.

      Wait and see.

      • The Great Transition is one almighty step backwards, from a flexible mixed economy that is able to adapt to most economic conditions, to a dirt-digging economy that is tied to the boom-bust cycle of commodity prices.

        I will resist it every step of the way, and if I have to resort to simplistic “them and us” tactics I will.

        I mean, if its ok for denialists (and Abbott) to use simplistic “Great Big New Tax” tactics, I reckon its ok for me to use simplistic “Miners Get Rich While You Struggle” tactics.

        • If you can’t beat ’em join ’em. Abbott has seriously damaged his reputation with these utterances – do you seek the same fate?

          Lorax, what do you offer as an alternative – an no – you can’t repost for previous idyllic pre-globalisation pre-floating exchange rate vision of Nirvana – a real world one please.

          • 2001 was a very good year.

            AUD was around 50c.
            Unemployment around 6%
            GDP growing at 3-4%

            I don’t remember Australia being an economic basketcase in 2001 and yet, commodity prices were weak, and we had no mining boom.

            How can this be so?

          • For the moment make do with this:

            http://www.youtube.com/watch?v=-w5cHU7LLsY

            Listen to it all…sublime.

            An apt connection – I was a mad Soprano’s fan – there’s a MacQ Bank connection somewhere…and reconfigured to Six Feet Under – the future of the non-resources sector, if we don’t get it right.

            Cheers.

  3. “every large push is preceded by a significant calming thereafter”

    Succeeded perhaps?

  4. Informative with great analysis.

    The GDP chart shows the -1.2% in great context.

    Only 1.8% of the workforce in the mining sector?? Am I reading that correctly?

    • Thanks Rota.

      With regard to GDP/employment, some of the spin coming out of the jobs figures today is the fact that population growth is slowly down – now 1.6% from a high of 2.1%

      Its quite simple to get the 2% GDP growth maximum potential figure –

      1. population growth is slowing down, permanent migration is accelerating (due to high cost of living)
      2. demographics are changing – less spending, more saving
      3. productivity has been declining for over 5 years – less productivity, reduced growth (regardless of population increase)
      4. debt creation is decelerating. Aggregate demand = spending plus change in debt. If change in debt is decelerating or reversing, GDP slows down or reverses (i.e the Credit Impulse)

      FutureBoom! can’t stop this music. I’m not sure why this country’s “leading economists” aren’t listening to this tune and instead are holding up their ears to the faint sounds of a Wagnerian opera that is the mining boom (i.e 15 minutes of brilliance amongst 4 hours of dullness)

      • Glad you just mentioned the credit impulse. Was just about to bring it up.

        Also, that commodities index has appeared on this website before and as I have pointed out before (forget which cartoon character name I was) The index begins during a bearish commodities period so distorts the current levels as being unusual to say the least. The RBA did a study prior to the GFC that covered the last 100 years and the 80s and 90s where the exception rather than the rule. In other words the levels we’re seeing are not really that high when taken in a 100 year context.

  5. Thanks for your efforts and analysis Prince.

    What concerns me the most about this era is the complacency which exists largely due to state and federal governments continuing the “resource boom” rhetoric. As a young person, I also find it alarming the number of people in my age group who have blindly hitched themselves to the bandwagon and expect an easy ride over the next 10-20 years as a result.

    On the whole, it appears Australians have come to expect the asset price rises we have experienced over the last few decades to be normal or a kind of “new normal”. That somehow it is easy to make money by investing, and as a consequence over time, expectaions become too high. Many from the baby boomer generation still have retirement expectations anchored to the All Ords being at 6500.

    Instead of urging optimism for the future with a sense of caution, the government is fostering complacency and this does not augur well for our economic success.

  6. Excellent analysis. And I love the term “bullhawkian panic”!

    Regarding the convergence of EM and developing bond yields, I’d argue that there’s a lot more going on here than the long-term move towards gov debt as an asset class, but that’s another debate…

    • Be good to hear your thoughts on this in the future RA.

      On a similar vein, I’ve come across some interesting analysis regarding the current valuation of the Euro if the D-Mark were still around.

      It posits that the “cheap” Euro, like the Yuan, is giving the Germans a helping hand in exporting its goods, in comparison to if they had retained the D-Mark….

      but more on that another day. Trichet has just announced a rate rise is imminent at the ECB….

      • Will have to add that one to the growing list…

        Interesting regarding the “cheap” euro. It’s fun reading the wire reports today twisting themselves inside out trying to explain why the euro is down after Trichet. Strong vigilance!

  7. “rates are still at near-historic lows…”…..ahh, the mortgage rate isn’t/. Remember that little thingee about banks raising rates? About 125bps all up….

    And bond bubble? I prefer to look at it as a bubble in bad news.

  8. You’re quite right apj, the standard variable mortgage rate is not at an all time low – but it is nearly 2% (200 bps) lower than the highs in 2007 and more than 1000 bps lower than the “recession we had to have” in the early 1990’s.

    In all cases, the proportion of disposable income paid to mortgages is at a record high and higher than at any other time (except for a fleeting moment during the GFC).

    The fact that a measly 25 bps rise gets the hearts a fluttering (and only one third of households have a mortgage) is evidence that debt saturation is here…

  9. I wish they did a CPI just for the cost of food. And then one for rent – one for energy costs – one for buying established homes. It would be interesting to see how these things have gone up in price…the staples of life!