Sudden bears call for rate cuts


Warning, this post is touched with schadenfreude. There’s nothing quite like the now patented mid-year global slowdown to flip bear switch.

Karen Maley at the AFR is first up:

Ominously, analysts noted that the gold price has only suffered two sharp declines in the past five years, and both were at times of deep global instability. In July 2008, the gold price fell by 21 per cent, in what turned out to be a precursor to the global financial crisis. In September 2011, the gold price again collapsed by 20 per cent at the worst point of the euro zone debt crisis.

However, some argue the gold market is oversold, and that the extremely negative sentiment towards the precious metal could see the price move higher. They argue that since the beginning of the year, global central banks have ramped up their money-printing, while the recent Cyprus bailout shows the risk of keeping money in banks.

Certainly, many leading investors, including John Paulson, the US hedge fund manager who made billions by shorting the US housing market ahead of the financial crisis and who has made a huge investment in gold, continue to keep the faith. According to the Financial Times, John Reade, one of the partners of Paulson & Co said the hedge fund remained confident in gold’s outlook. “Federal governments have been printing money at an unprecedented rate creating demand for gold as an alternative currency. It is this expectation of global paper currency debasement which makes gold an attractive long-term investment”, he said.

I’m inclined to agree with the view on gold. But the reason why is not because we’re tumbling into some unforeseen, terrible and imminent recession. It’s because we’re going through the mid year slowdown that we have repeated every year since the GFC. If it gets bad enough we’ll see more QE. There  is no mystery here. As I’ve written all year and repeated last week:

The clearest representation of this is in the ANZ’s Global Leading Indicator for manufacturing (charted against US 10 year bond) which is oscillating with the regularity of a metronome:


Another way to look at it is through the JP Morgan global PMI, which is also bouncing and rolling over like clockwork:


I expect we’ll see fading data for the next six months. As such, stock markets will struggle to go higher from here. Indeed, the mid year slump has also been a feature of the S&P500:


The pattern appears to be driven by the US economy (although there’s a big chicken and egg problem here). The manufacturing ISM shows the same pattern:


As does employment:


This is a simple inventory cycle. US consumers can’t spend like they used to when their asset markets only went up and made them feel rich. Instead, they go through mid year spasms of saving then loosen up again at Christmas. The economic effects of this pattern have led the US Fed to boost the cycle in Aug/Sep with more QE. Barring something unforeseen like a leveraged ETF meltdown feeding back into global banks, the same pattern could and will repeat itself if necessary.

But according to the Kouk, we are all just corks tossed in the heavy seas of the unknown. No wonder. Just a fortnight ago he saw rate hikes all over. Now we need cuts apparently:

International investors are still upbeat on Australia, its economy and its macroeconomic policy settings, which are underpinning the dollar at a time when it should be falling sharply.

The Reserve Bank said it is powerless to do much about it, other than set monetary policy to an easy setting to mitigate the effects on the real economy from the Australian dollar being so over-valued. The government can’t do anything about it either as it remains unquestionably committed to a floating exchange rate, as it should of course.

The dynamics are suggesting that the Reserve Bank may well need to cut interest rates yet again and soon. The recent uptick in unemployment, the low inflation climate and soggy business conditions all point to some downside economic risks ahead. The Chinese data in addition to the sharp fall in commodity prices risks exacerbating these downside risks. While an interest rate cut wouldn’t do much other than take a few more ticks off the level of the Australian dollar, it might set up the domestic economy for a period of decent growth even if commodity prices remain weak or fall further.

For heaven’s sake, there are lot’s of things we could be doing:

  • RBA should print money for other central bank portfolios
  • government should be installing Tobin taxes
  • macroprudential policy should be debated
  • the capital gains on investment property should be cut
  • land use should be liberalised
  • export incentives should be introduced

The Kouk’s suggestion that we just cut rates again to boost his 10% per annum blowoff in property specufesting is absurdly limited.

Of course markets are now pricing almost two rate cuts in the year ahead, as they should be in terms of the economic outlook. They should never have done anything else:


God I wish I was Paul Bloxham.

Houses and Holes
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  1. So you suggest buying gold ? though it is getting smashed I guess at the end of the day it can only go up in the future been a finite resource and if the GFC does get worse then what? people may rush to metals because paper becomes worthless. So maybe after tomorrow or next week it would be a good time to jump in.

      • Gold’s my hedge against the AUD.

        Yeah, it’s down. But if China pops, the AUD will follow RAPIDLY (again).

        This time, I doubt stimulus will work because the Aussie stimulus really only had an effect measured in weeks or months. It was the China stimulus that worked.

        I’m possibly in for a big round of losses, but what can you do? You don’t take the risk, you don’t get the reward.

  2. there is a clear disconnect between the paper and physical market. andrew maguire states that the crash was orchestrated by the bullion banks because of impending default due to lack of physical gold available for delivery. certainly the events leading up to crash were too strange to be coincidence alone – fomc minutes released early, false rumours re cyprus central bank selling gold, goldman calling for going short gold and the systems serendipitously crashing late on friday.
    is something big going to happen soon?

    • False rumors, goldman sell call, all means someone wishing to close large short position and looking for willing sellers, besides gold/silver physical premium over paper market is rising, in 2008 panic silver went to $8 but physical premium through the roof means you could not buy any significant quantity of silver for the price paper market showed

      • The Greatest Movie ever made mate

        And the Mexican standoff scene would have to rank right up there with the greatest scenes ever.

        When the time comes for me to check out I am going to buy two graves and get buried in an unmarked grave alongside Arch Stanton

  3. Everyone’s pannicking. It almost feels like the can has been kicked as far down the road as it reasonably can without resorting to obviously desperate measures. Easier money and more debt is the only solution if we’ve decided (as our government has) that no one that votes for us should ever feel any pain.

    That’s the problem with can kicking – there comes a point where you can’t kick it any further without making it obvious to everyone that you’re not really solving anything but just trying to delay the inevitable. Australia is at that point now.

    • not really. the europeans have been kicking the can down the road for god knows how many years but nothing seems to ever happen. the eurocrats find new way of postponing the inevitable.

      • Like confiscating the life savings of an entire country’s population? I’d like to see them do it again, with … Spain.

  4. HnH, I am with you on the things we could be doing. I think there are many things we could do to guide the economy in the next 10-20 years.

    I have been reflecting on what a very great thinker and practitioner in economics in this country – HC Coombs – would be doing right now.

    He helped set up and run the system that delivered the post-war expansion – an expansion that did not end with household debts at 95% of GDP, such as the current one, though had its other constraints.

    We should ask ourselves how to sustain growth without relying on the unsustainable expansion of debt. At least, because we still issue our own currency, this is theoretically possible in our economy.

    For 25 years we have run the economy without trying to achieve external balance. Now we have no choice. We have to progress to external balance whether we like it or not while also trying to sustain full employment.

    This should be the over-riding goal of economic policy and the means by which this is going to be achieved should define our economic and political choices. Of course, I do not need to tell you this. Quite clearly, MB has made a great contribution to bringing this into focus already.

    • I have been reflecting on what a very great thinker and practitioner in economics in this country – HC Coombs – would be doing right now.

      A Keynesian with a belief of full employment, let the unviable economic crap fall… well if I were to make assumptions, it would be a very narrow band.

  5. Any word from Bloxo yet? I’d love one more straight-faced insistence that we won’t see any more rate cuts this year.

  6. Please not that the Bear Dove shares little DNA with the Bear Hawk.

    Bear Doves are soft plump creatures conditioned to an easy money diet, that when faced with a challenge run quick smart to their sweet stash of interest rate cuts.

    The Bear Hawk is a much more resilient creature and understands that challenges should be met with a keen and focussed eye unclouded by the fog of excessive ‘stimulation’. The Bear Hawk is patient, keeps calm and remains ready to swoop on morsels rendered fat and helpless by excess stimulation.

    The Bull Hawk is an unusual creature prone to dehydration. Although it is very optimistic by nature it tends to stop drinking the moment it confuses a mirage for an oasis. The Bull Hawk can often switch at will into either a Bull Dove or Bear Dove and back again without the observer noticing. Fortunately, the trail of a Bull Hawk is easily followed.

    The Bull Dove – is never happy and remains a dove regardless of the degree of exuberance gripping the economy. The Bull Dove often sells stuff (especially real estate and electrical appliances) on credit.

  7. H&H,
    “God I wish I was Paul Bloxham.”

    Where there is will there is a way… Make up your mind and started working and you will get there!! 😉

  8. The RBA shouldn’t have paused the rate cuts. Everything points to Australia needing lower rates:

    – overvalued currency
    – under-recognized slack in labor market
    – weak nominal GDP growth
    – low inflation

    The only reason they have paused is because the real-estate circus is threatening to resume the housing/credit bubble. What isn’t clear to me is, why the whole productive economy should have to suffer an overvalued currency and tight money, just because the real-estate industry refuses to roll over and do something productive.

    • Because with private debt already sky high and the entire economy held hostage to four very large banks and their overweight mortgage books, the RBA has realised that they have a duty of care to keep the beast on its leash. Their liabilities are our liabilities. At least that’s what they appeared to be thinking until recently. I think what they’re ‘trying’ to do now is lengthen the leash a little to see if these banks will use the extra freedom responsibly. The RBA knows that unshackling the beast altogether would result in complete destruction of the surrounding landscape, so thankfully they haven’t done that. I guess this is what happens when your economy consists of only two industries and one of them is slowing down. Our problem is that the other industry is a parasite that’s taken over the host and threatens to overwhelm us both if it’s not kept in some sort of control.

    • “What isn’t clear to me is, why the whole productive economy should have to suffer an overvalued currency and tight money, just because the real-estate industry refuses to roll over and do something productive.”

      If real-estate prices rise sharply (i.e. 10% pa) they will eventually crash, the Austrlian banks will bust, the there will be no productive economy left.

      Hence, slow and steady gains in real-estate prices are much better for the broader economy. The RBA pausing is the right thing to do – for now.

      • Don’t agree. Holding off on rate cuts in order to keep a lid on house prices is playing with fire.

        How will the banks and their mortgage books look if Australia drifts into recession because the RBA prematurely wound up their rate cuts?

        • No-one is talking about rate increases here, just not rushing to cut any further just yet. To further encourage house price speculation would be to make what is already a bad situation even worse. And in any case, the fact that we are so beholden to four banks that have bet everything on mortgages is a problem in itself. Knowing that further rate cuts in quick succession are highly likely to result in a bit of a sharp spike in house prices, I think the RBA is doing the right thing by holding off for now.

          • Agree. Gotta leave some dry powder.

            There are any number of (plausible, if not probably) scenarios that could see the bullet-proof Banana-Republic-esq nation of Australia slide into recession. Signs of weakness are everywhere. Employment markets. Labour productivity. Manufacturing. Household debt. Although I think most of the RBA’s public responses & reports are BS, leaving room to fire up the printing press & cut rates at least gives us wiggle room for asset values to correct in (hopefully) a more controlled manner.

            There is little doubt that our largest debts – and those hopefully with some equity in them – our land/property market will bear the brunt of a downturn (at least so far as the household balance sheet goes).

            As it is we have the muppets in the real estate lobby (& “analysts”) harping on about there being no better time to buy on account of interest rates. In fact even ANZ is spruiking that view! If we cut rates further it will be more ammunition to catch out suckers, many of whom can least afford it (i.e., tie a $700k mortgage around the neck of a 20-something year old)

  9. This really is the problem with just using monetary policy alone – it works really well for the middle class economists that propose it. They are most likely not using the currency as a store of value, they are using assets. That monetary policy nearly always favours asset holders is just not even questioned.

    This is as simple as just look at what protects the status quo wealth – as it always has been.