Before taking a well deserved break after the end of a remarkable year, the team at MacroBusiness sat down recently to share their views on the events of 2011 and the risk and opportunities that lie ahead.
The discussion was framed around 5 questions with the first 3 answered in today’s post, with the remainder to be posted tomorrow.
Question 1. Given the events of 2011, is a macro viewpoint essential to understanding the economy, your business and your assets?
The Unconventional Economist (UE): In an era of globalisation, economies are so inter-connected that an issue at one end of the globe can quickly spread to other seemingly unconnected regions. Take Greece with its tiny economy for example. Understanding these linkages is vital to understanding the risks and opportunities facing Australia and, importantly, one’s investments.
Delusional Economics (DE): If these events have taught us anything it is if you were just looking at individual companies or even intra-national sectors you would miss the “big picture” that macro-level imbalances and the associated geo-political issues would readily highlight the risks and opportunities.
Rumplestatskin (RS): I believe that macro is mostly the study of institutions and the rules of the game (including the rules of money creation). If the world was one country, with the same government, institutions and economic regulations, labour prices would converge and many of the comparative advantages countries appear to have now would disappear. Those advantages that remain would be their natural advantages, while those that disappear are the ‘regulatory advantages’.
We often ignore that macroeconomics and global economic integration, is mostly a battle over national interests through domestic policy.
Houses and Holes (HH): I believe if you can’t understand that the macro viewpoint is essential, you don’t deserve your wealth. As one commenter said recently –
“The present macroeconomic position worldwide is unique and requires an analytical approach to understand rather than extrapolation of historical data. Advisors recommending buy and hold are happy to take fees while your savings evaporate. The (investment) industry is a paradise for parasites and needs major overhaul.”
The Prince (TP): It showed you can’t rely upon an “exceptional” ideology – i.e Australia is different. We are different, just like everybody else! Unfortunately these filters of how we see the world are based on a falsehood of how economies and markets really work. This has definitely been MB’s “edge”.
Deus Forex Machina (DFM): Bottom up analysis of companies, countries or currencies is always going to be fundamental but unless you do it against the macro overlay or backdrop then you have just got one piece of the 3-D puzzle.
Q Continuum (QC): I agree with DFM – micro analysis is important to gauge quality and provide a measure of value, but in isolation is akin to assessing ocean conditions by examining how well-built your boat is.
Sometimes even the best boats get tossed on the rough market seas – a macro viewpoint is essential to understand the prevailing conditions.
Question 2. Was 2011 just another year or a turning point for the Australian housing market?
DE: I actually think that 2010 was the turning point. The long running trends in credit issuance started back at the GFC and were only turned around temporarily by counter-cyclic fiscal policy in both Australia and China. The influence of that policy ended around April 2010 and we have been riding that trend ever since.
UE: But 2011 was the signal for the end of an era of solid capital growth…
HH: The only question is whether this is a slow deflation or a bust. Even a medium term rally in credit and hence house prices, is unsustainable in the face of more expensive international capital. The market is also heading into a major demographic headwind…
DE: Demographics is definitely the long running influence on house prices in Australia. HH is right – we could see another spike in prices in the medium term, but without a new burst of immigration we are unlikely to see housing return as a stellar speculative asset class for a number of years.
RS: I disagree with the turning point – it was back in 2008, where the combination of direct and indirect fiscal stimulus (cash hand-outs and FHOG boost), plus aggressive monetary loosening through lower interest rates, created a short-term boost. Next year we should see prices continue to soften, possible at a slower pace than 2011 (not fall, never say fall).
DFM: I’m with Rumple – the GFC was the big turning point. It induced the boomer influenced economic and governmental leadership to try the old “first home buyer intergenerational boost/transfer” one last time.
But Australian’s aren’t so silly now and they recognise that debt is not a never ending road to riches. With a lower demand comes the lower upward pressure on house prices. To me this is the enduring positive of GFC – demand for debt is lower, house prices will simply be a reflection of that in the years ahead.
Question 3. What did you get wrong in your analysis and how has your opinion changed?
HH: The bounce following the US post debt-ceiling debacle! Given the weakness of the economy, I shouldn’t have been surprised at its vigor. Long ago I learned that only extreme poverty prevents the US consumer from fulfilling his destiny!
UE: When I first started blogging, I did not fully understand the nature of supply-side constraints on the housing market. Back then, I was of the view that the tax regime/credit was almost fully responsible for Australia’s housing bubble and that urban planning policies had minimal impact on house prices.
This view changed throughout 2011 as I gained a deeper understanding of the issues and studied other nation’s housing markets. Now I look at both demand (credit / tax policies) and supply-side factors. Both sides of the equation are responsible and each influences the other.
RS: I would say there hasn’t been enough time passed yet – ask me in 2012! I did expect some decisions in Europe by now, and I called the next move of interest rates down early last year, missing the Nov 2010 increase.
DE: I think I was too bearish on the banking sector, maybe I was just too early with my call. I certainly think I underestimated the mining booms influence on national incomes, which led me to believe that housing arrears would be in a far worse position than they are now.
Ultimately the Australian banks may come unstuck because of their poor liability management, which will lead to the same result, but my opinion on their asset quality appears incorrect at this stage.
QC: JB Hi Fi was my worst call by far. I still think it’s the best retailer in the country but I understated the macro viewpoint.
TP: I was surprised by the fast compression in P/E ratios on Australian stocks, particularly well managed and highly profitable businesses and how quickly investors parked their capital in cash. This has reinforced my opinion that we are more and more likely in a secular bear market, but this bearish sentiment has my contrarian nose twitching.
DFM: My opinion of the RBA is the key thing that changed for me this year. I have always felt that they do an exceptional job because they are flexible in their approach but their belligerent adherence to the mining boom meme when it was evident that Australian’s are/were largely untouched by the flow of cash into the miners coffers and were instead saving showed me that no matter how many PhD’s in a room you still need the little kid to say “the emperor’s got no clothes on!”
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