The MB Team discuss 2011

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!”


  1. Just with reference to HH Question 1:

    It is an ironclad law of nature that a fool and his money are soon parted. The role of the financial advice industry is simply to speed up this process.

    (Except for QC of course!)

    Thanks for all the post this years guys – have a merry Christmas and look forward to reading again in the New Year.


  2. Thank you for a great site with wonderful discussion.
    Whatever your calls last year you were so much closer than anyone else anyway. The problem is picking what those, who don’t understand what they are doing, are actually going to do. It ain’t easy!

    • Great stuff MB team. Really glad you all came together and created this super blog. Merry Xmas and Happy New Year

  3. “I believe if you can’t understand that the macro viewpoint is essential, you don’t deserve your wealth”

    Someone needs to be considering it that’s for sure… But it’s a bit far to say YOU need to understand it or you don’t deserve it. We live in a world of specialisation. We can’t be expected to understand everything. A computer programmer who makes a fortune from inventing a new way of doing things deserves his fortune as much as anyone else. It’s a bit like saying if you don’t understand electricity you don’t deserve it. We have electricians for that and we specialise in something else.

    • Some people don’t realise that is the whole point of regulation. The job of regulators is to monitor the area they are in charge of so that people in other areas can spend their time on their area of specialisation so that their knowledge and ability can been as deep and capable as possible and trust that the regulations will protect them from things such as food poisoning.

  4. It’s been a pleasure chowing down at your free, all-you-can-eat bear food buffet this year. Save some room for the gold-dipped profiteroles.

  5. I have been following since March this year, always good discussion and some great topics, always enjoy the economic idealogy posts, would like to see a full on Austrian versus MMT debate. What was also great was the Carbon Coyotes contribution re the carbon price

  6. A fantastic range of information. This blog is required reading. Thanks very much for sharing your knowledge.
    Happy Christmas and dare i say, a happy and prosperous 2012 to all of you.

  7. My opinion is that the Macrobusiness contributors have done a sterling job and the contrast with the Gittins effort is huge. Gittins appears to do no work and just shoot off his long standing personal opinions posing as analysis.

    The degree of difficulty of forecasting is that the future is essentially unknowable as you never know the unknown unknowns (Rumsfeld). In the case of Australia one particularly has the unknown state of mind and policy of arrogant and incompetent (now) government and the way of thinking of the management of the Treasury and the RBA.

    One criticism or suggestion I would make for a macro site is the possible construction of a financial conditions index. One of the brokers has one (maybe Merrill Lynch) but I do not see it. The composition could be
    * differential of interest rates with comparable countries -deposit and lending
    *real interest rates trend
    *over or undervaluation of the currency
    *fiscal expansion or contraction of the federal and state governments
    *commodity prices (eg RBA index) rising or falling somehow combined with volumes increasing or decreasing -rural and mineral
    *inflation rising or falling
    *M1 controlled by the RBA high or low and relate this M1 growth to population growth GDP and inflation

    I am amazed that the RBA does not do this but then again when I have written to them about past consistently huge increases in M! they have written back to say that this essentially does not matter to which I responded OK if it is 15% let us try 30% and see if this does not matter.

  8. Thanks for the fascinating analyses this year. Merry Christmas and I look forward to more MB in the New Year.

  9. An empowering experience!

    I only wish you were available to the multitudes years ago, then perhaps there would be less heart ache when the day of reckoning arrives.

    Happy and safe Christmas to all,

  10. I have learned a lot and it’s helped with my studies as well. The macro view here is a credit to MB IMO. I don’t read much MSM, and never for a financial view now.

    Thanks a lot and wishing you all a great Christmas and New Year.

  11. MB bloggers, Are you the aliens that some have called for to rescue the global economy? Just asking due to the pic you have chosen. 😉

    This site provides the most comprehensive and levelheaded macro coverage I’ve found on the web. The commentary is interactive and also generally polite and forgiving so thanks to everyone participating as well.

    Merry Christmas and a Happy New Year to everyone. Let’s all take a good break from the depressing news and enjoy the good things in life.

  12. Congratulations on an amazing year MB!

    You forgot to mention one aspect of your stellar coverage: History. With most financial media assuming the world is at a constant equilibrium (with the occasional exogenous shock) your work on previous economic ages sets you apart.

    Wishing a Merry Xmas and a Happy NY to the team and all the readers.

    • Hey,ALex78 haven’t seen-ya in a while,I’m in and out all the time…anyway..I was just next door thought I’d call over..wish you a Merry Xmas..cheers..hey,see I got one of you’re flights pictured in the end of year theme-song..yeah,i even got into a background shot,behind one by flawse ..alittle rewards for policing all those Bi-planes,when they park over the lines…
      by terminals…anyway ,I’ll leave with a quick question…Do you think Red suits me? friend..JR

      • ..and in not leaving you out,3d
        and you’ve been a greatly reliable ticket-machine all year
        as well..just letting you know…JR

  13. No need to search the clouds for the Stars
    too guide us ..would you like too fly,
    We float amongst the Stars…at MB
    Check-out our new theme song,for the all the successful thought’s that took flight this year
    up,Up and Away “Terrifically And Admirable”…Hope you Enjoyed the Balloon ride..Cheers JR

  14. Thanks for a great site. I’ve enjoyed a lot of your work, including the excursions led by Rumplestatskin. The highlight for me though was the article about investment strategy that one of you put together.

  15. This is the kind of round table talk that anyone would want to be a fly on the wall. Humbleness in uncertainty and sturdity of thought processes simultaneously. Not an easy virtue!

  16. Merry Xmas MB! Thanks for helping me ditch the MSM. Isn’t it amazing what happens when you don’t pitch to the lowest common denominator.
    ps. I’ve never understood fascination with JB hi-fi. I’ve only 6 letters to explain my bewilderment – i t u n e s

  17. Awesome blog! I’ve been lurking for most of the year and I have learnt much already. Keep up the good work all.

    Gobble gobble.

  18. I’ve been reading UE and DE for over a year now and have really enjoyed the blog! There’s too much information for me to take it all in and fully understand, but coming back from the UK (with Aussie husband) it has really helped me get to grips with the mindset and what’s happening in Australia. Has also helped me make the decision to delay buying a house here (after having negative equity in the early 90’s and having to sell up in the UK in 2009 after house prices had fallen 20% I don’t want to get burned again)! Keep up the good work and Happy Christmas to all.

  19. two plus twoMEMBER

    Bravo Macrobusiness. This site has been a fantastic discovery for me over the last couple of months.

    To all contributors and commentors, have a very happy Christmas. I’m looking forward to reading more articles, intelligent analysis and debates 2012.

    • DFM is on holidays, as is Houses and Holes. Both will be back by mid/late January.

      The rest of the team are also taking off for Xmas/NY break – EDIT: after tomorrow of course.

      You’re all stuck with me and UE until then.

      • What about DE? One last Euro bazooka analysis please. Otherwise, we will have GB gloating all the way to the new year.
        TP: read above Mav

  20. “I believe if you can’t understand that the macro viewpoint is essential, you don’t deserve your wealth”

    I think this comment should go to the RBA and Australian Govt.

  21. “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.”

    During the cheap credit boom boom bubleicious ponzi property growth, pop growth rates FELL.

    and, Philip Soos:
    “This is probably the most popular argument used by the bubble deniers. The story is that as Australia is suffering from a chronic deficit of properties to shelter a growing population, so demand is greater than supply, leading to rising housing prices.

    The problem with this argument is it can’t explain why prices started to rise in 1996 and skyrocketed from 2001 onwards. Annual population growth between 1996 and 2005 registered at approximately 1 per cent, taking off between 1.5 per cent and 2 per cent from 2006 onwards. (Fundamental supply and demand issues explain rent prices, not housing prices, which is why rents have increased from 2006 onwards).

    2007 was the first time since 1950 that the population increased faster than the number of dwellings. If the housing shortage argument was correct, housing prices should’ve started to rise from around 2006-2007 onwards, not 1996. The historical data shows that there is no correlation, let alone causation, between population growth, dwelling supply and housing prices.”

    • Merry Christmas to all and hope MB is in as good a form in 2012 as 2011.

      I’m sure Eurodude DE; The Property commentators HnH and UC; and, The “equities” Prince will have plenty of material to work with in 2012 🙂

  22. Well done to all at MB, you have the best financial/economics blog in the country.

    One thing i’d like to note is that the exceptional quality of the articles also leads to an exceptional quality of comments with a diverse range of views. The quality of comments here, which add rather than subtract to the discussion, is a key strength of MB and really sets you apart from most other blogs i have read.

    Keep it up guys.