Call an early election, Malcolm

I don’t know what kind of advice Prime Minister Turnbull is getting on the economy but judging by what’s being said in august corners and corridors it’s probably not very good. The RBA’s Statement on Monetary Policy on Friday suggested that it genuinely believes that it has conquered the mining boom and bust cycle. Treasury is making noises only about long term Budget reform, with little urgency, even though it has just watched its fifth successive MYEFO sink beneath deflationary waves. Our most prominent media is addicted to a tyrannical optimism that serves only its ends, take the nation’s leading business column on the weekend, Chanticleer:

Perhaps the best example of extreme negativity was the call made by Andrew Roberts at RBS in London. He published a note on January 8 which included the line: “Sell everything except quality bonds.”

…But what if all the pundits are wrong? What if the markets have overshot? Is it at all feasible to think about big unexpected moves to the upside?

In trying to answer these questions Chanticleer turned to a number of respected local and international sources starting with an experienced and successful bond fund manager, Phil Carden.

…Carden, who set up Macquarie Group’s bond desk in Sydney in the late 1980s and in London in the early 1990s, says the sell-off in the US corporate bond market is based on false assumptions. The sell-off assumes that a wave of defaults are coming which will virtually wipe out investors’ capital.

Carden says collateralised loan obligations, which are backed by a pool of secured corporate loans, offer good returns even assuming worst-case scenarios come true.

…To get an idea of the crisis mentality in oil-related bond markets, the spread on the US high yield energy index last week hit 1535 or just below the high of 1587 reached during the depths of the global financial crisis.

The prices make perfect sense and the false assumption is Carden’s. Energy firms are far more leveraged now than in the GFC and have invested those enormous borrowings into the globe’s marginal cost oil production. They are the “sub-prime borrowers” of the cycle and are going bust whether a wider crisis results or not. I’m sure that Chanticleer is only joking when he says we should trust a leveraged structured product like a CLO!

By habit or design, everyone in the Australian discourse is cherry-picking data in support of our waning exceptionalism. The seriousness of the Mining GFC is either misunderstood or being whitewashed. This is despite the crisis being relatively simple at its heart. The global commodities glut is so big that it can only end with mass bankruptcies to rationalise production. Central banks can’t help, they only raise prices and keep production high. It is a clear and present danger to the Australian economy because  all of our key export prices continue to sink.

And that is only the context. At home, the second half of the year is shaping as difficult all by itself. We are still plunging down the mining investment cliff and it will run right through 2017. The car manufacturing closures of PMT’s predecessor begin in H2. The residential construction boom is peaking right now and will likely begin to shed jobs by mid year. House prices are falling fast in Perth and Darwin, are stalled in Sydney and will likely follow in Melbourne and Brisbane over the next few quarters. Both downturns will be exacerbated by capital controls on Chinese money here and there. Consumer confidence is slipping and, although retail was decent last year, it was a surprisingly ordinary Xmas season. Leading secondary indicators for the jobs boomlet (which is materially less strong than ABS numbers) have also been weakening in the NAB Survey and PMIs. Net exports will continue to offer a fig leaf for growth but do nothing for a domestic economy already in recession. By mid year, the only thing growing will be easy fiscal policy and LNG volumes but the latter is useless to the punters. By the time we reach an October election the nation will be in considerable discomfort and rate cuts will have resumed.

When Kevin Rudd took power the second time, MB advised him to run the full remainder of his term to try to regain some legitimacy by explaining the mining bust and what needed to be done about it. A few months ago we advised PMT to do exactly the same thing. The public is sick of party politics being put before nation and rushing to an early election in a honeymoon period is the very embodiment of that. Moreover, the reason confidence in the economy remains very low for this point in the cycle is that nobody has yet explained to the polity why their standards of living are falling.

Since then, PMT has instead opted for “confidence and innovation” as the narrative of his government, presumably to avoid any repeat of the Abbott Budget disaster.  Fair enough, but he should know that this is fighting the last war, and the battle ahead is on his doorstep. If Treasury produces another optimistic May Budget, and it seems incapable of anything else, then the balance of risks suggest that PMT will be held hostage to its hapless forecasts for five months (assuming an October election) while the economy deteriorates around him. His own narrative will be under intense pressure from something far more dangerous than Bill Shorten – an enemy that has already killed two prime ministers – a deteriorating reality. PMT has raised expectations when he should have lowered them and is thus vulnerable when disappointment arrives.

Given the sliding economic outlook, as well as the bureaucracy’s failure to understand it, PMT should bite the bullet and call an election as early as possible.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. Something’s been troubling me recently, and I’m hoping Macrobusiness or someone here might have some data/insight. Specifically, does anyone have any data on Chinese ODI over the past 6 to 12 months?

    Although the financial press has characterised China’s recent market interventions (i.e. domestic share market and currency support) as ‘muddled’ or ‘confused’ responses, I’m starting to wonder if it’s in fact very deliberate. It’s precisely the same action Singapore took during the Asian Financial Crisis – an event precipitated by overvalued fixed Asian currencies coming under heavy speculative attack. If memory serves, Singapore pulled off a managed currency depreciation and crushed international shorts by buying into their own stock market, forcing international speculators to take heavy losses.

    This looks very much like what China has done and is doing. Except there’s one key difference: China’s massive foreign exchange reserve. I’m beginning to wonder how much of the recent capital outflow from China has actually been ODI (as was the case with the sale of Darwin’s port to a Chinese consortium)? And whether further outflows of Chinese FX reserves, interpreted externally as them buying up yuan, is actually a long planned and massive ODI spree?

    Please tell me I’m crazy…

    • “Duabibanker” commenting on “China reserve plunge” Zerohedge story

      100bn is like less than 3% of their reserves…

      Plus they bought the largest hotel of America….largest movie studio of America…largest pork food company of America…largest or second largest movie theatre chain of America….the bankrupt Motorola….HQ of JP Morgan being Chase Manhattan Plaza… lots of real estate….and some oil fields… GE’s entire appliance unit….and last week also the Chicago Stock exchange…and only 300 Boeing planes!

      No wonder they have an “outflow”. 😉

      Anything else you guys have there to sell?

      Call me! 🙂

    • Overseas Investment is just swapping the foreign asset backing China’s locally issued yuan from one commodity/treasury bond etc to another. As long as the purchased asset doesn’t fall in value the amount of backing for the yuan remains stable. If either, funds leak out of the system ( unauthorised/uncontrolled capital flight) or the assets purchased fall in value, then the asset backing for the liability of locally issued yuan falls. That’s devaluation coming if either or both of those occur, and becomes a spiral down for them, and hence – us.

      • I’m just wondering if that swap will be from a liquid foreign currency denominated asset (e.g. bonds) to illiquid productive capital assets (e.g. the appliance division of GE). It makes sense I think. China seems to be one of the exceptional cases where the empirical predictions of the solow-swan model are borne out: a capital poor and labour rich country will attract significant international capital investment due to its (initially) high marginal productivity of capital. At some point the growth rate peaks when the MFP of capital begins to decline/converge with labour MFP and capital investment (and economic growth rates) start slowing down until they reach roughly a steady state. China has clearly passed this growth peak; frankly I’m surprised at how surprised public commentators seem to be about China’s declining rate of growth rate, as if it could magically maintain 7-9% GDP growth indefinitely.

        In a planned economy, the closer you get to the steady state point, the more you start to look for growth from the solow residual (e.g. technology, education etc.). So you buy up higher tech foreign companies with more sophisticated capital assets and more advanced production techniques/IP. In addition, if you have an artificially appreciated currency staring down the barrel of devaluation, it makes a lot of sense to buy offshore productive assets generating income in foreign currency, to keep national income afloat in the short-term while you move that better quality capital and technology onshore and combine with domestic labour.

        I guess what I’m saying is that China is in the position to buy itself a large foreign income stream in the short term, and a rapid increase in total factor productivity in the longer term. The question is: is this what they are currently doing?

        EDIT: put another way, it’s the other side of Professor McKibbin’s equation…

  2. Turnbull’s Government is paralysed. This much is evident from their “talk big, do nothing” strategy. He appears to be terrified of both the electorate as well as the RWNJs in his own party.

    Leader’s don’t just need to give good speeches, they need to make decisions and so far PMT has made none.

  3. I know egos are big in Canberra, but why on earth would anyone want to win the next election? If there is a recession or a property crash the party in office will be unelectable for at least a decade! If it happens on Labor’s watch (again), they might just be done as a political force. I’m sure i’ll come to regret saying this, but let’s see how the Coalition handles or mishandles a potential recession.

  4. I hope MB have not bought into the Fantasy Malcolm narrative that the rest of our lemming-like media have bought into (the same group think reporting that helped propel Abbott into office).

    The fantasy Malcolm Turnbull that exists only in their heads. You know, the one that is going to get rid of all the bad policies of the government and make everything OK. Just give him a little more time… any minute now he’s totally going to do it. He just “needs” to win an election! He will totally be a good PM!

    • My experience tells me you can get into hot water on MB for saying things like that! Turnbull was NEVER EVER going to be the answer for Australia’s problems. I like him personally but he does not have what is required to understand the situation this country is in let alone what it needs.

      • He was a needed circuit breaker from the Abbott666 hate that had infested every aspect of the political culture. This hysterical hatred thwarted any rational discussion and ensured no reform could ever been implemented. This was driven by the media and ably supported by the Senate, a disgraceful period in Oz politics at a time we needed some kind of bipartisan national agenda.

        As to whether MT can do it or not, I’m doubting. He seems unprepared to potentially forfeit his current media love-in but should be watching the edges of this beginning to fray as we speak.

        Extraordinarily, the media are now demanding reform with immediate effect, ignoring its prime role in quashing any moderate and sensible discussion on same for the past few years. It is a petulant demanding mistress.

      • “This hysterical hatred thwarted any rational discussion and ensured no reform could ever been implemented. This was driven by the media and ably supported by the Senate, a disgraceful period in Oz politics at a time we needed some kind of bipartisan national agenda.”

        And then Dr No won the election and was dumped by his party soon after.

      • If you’re alluding to the RuddGillardRudd years, there was no interest in reform of any kind that would set the nation on a sustainable economic path. Spend, spend, borrow and spend was the mantra. Bill’s no different, but then again I’m not seeing too much restraint from MTScoMo…

      • Abbott hatred … Thoroughly earned by his own behavior. I think the media came down with a serious case buyer’s remorse, as well they should have.

      • “This hysterical hatred thwarted any rational discussion and ensured no reform could ever been implemented”

        Oh 3d1k, when are you going to realise Abbott sealed his own fate in Opposition. He promised something he could never deliver- an honest government and a government of no surprises.

        The funny thing is his criticisms of Labor were actually fair enough, but then he won and made all the same mistakes!!! Unbelievable. Anyway, you keep blaming the media, the truth is he snookered himself.

      • 2d decoded: bullshitbullshiybullshit, blahblahblah, bsbsbsbsbsbs.

        2d, “This hysterical hatred thwarted any rational discussion and ensured no reform could ever been implemented.” You’re either an unashamed liar or seriously deluded. There was never anything rational that was ejected from Abbott’s mouth.

  5. “PMT has raised expectations when he should have lowered them” Yes he should. He didn’t. He must do now. The days of ‘all we have to fear is fear itself’ have come and gone. No one in Australia is ignorant of what’s happening. They, like most, might pretend that it isn’t looking grim, but…they know….

  6. “Given the sliding economic outlook, as well as the bureaucracy’s failure to understand it, PMT should bite the bullet and call an election as early as possible.”

    Please don’t join the silly early election call. It’s “unlikely” for very good reasons.

    The government could call a double dissolution for the first half of the year based on the double dissolution triggers it already possesses. However, the re-setting of Senate terms caused by the double dissolution would result in another half-Senate election having to be called in the first half of 2018.

    As governments hate separate half-Senate elections, a double dissolution would almost certainly result in another House election in the first half of 2018. A double dissolution would effectively deliver the new government a two rather than a three year term.

    • Agree – Labour seem utterly bereft of ideas – their big idea is to fight for immigrants to stay in Australia. Makes no political sense to me – nor practical. Shorten and Wong are gifts that never stop giving for the Liberals at the moment.

      I think the Liberals could easily wait until mid to late year. There is no panic in the Australian public yet, and even if there was an equities crash, that won’t play into Labours hand in any case, because there first reaction is to spend, but ultimately its a negative message in the LT, because at some stage you have to pay it back. Liberal Innovation will save us, fundamentally it is a BS positive message, clever country looking to the future, blah, blah, blah.

      Shorten and Co. will simply say we have to be “the clever country”, and spend more on teachers and science. Its all BS of course because a country to benefit it has to monitise it eventually, which is virtually impossible without the above innovation stick, its political cheque mate for Labour, they have no chance…

      Two teams with essentially same BS message. Crash coming, you cannot avoid it…

      • I think MT is saying all the right words but I really want to start seeing some consequent actions. I’d suggest the best reason for calling an early election is to be given the immediate mandate to implement his plan. I know I’ve been very bearish wrt Australia’s shrinking pool of strategic/economic options but maybe MT can bring about some changes. We’ve tried BIG mining, we’ve tried Housing to the Moon, we’ve tried Financialization of everything; all great buzz concepts, all innovative in their own regard unfortunately each iteration has left the social fabric of Australia weaker. If you asked me, I’d say the root cause of this decline is our failure to optimize / maximize the value of our Human capital with anything like the same enthusiasm that we Maximize House values, Mine output or Financial capital.
        I’ve got a feeling that the 21st century will be a very unkind world for the less skilled and a gold mine for the highly skilled….Australia needs to decide which camp we want to be in, if it’s the highly skilled than we need to aggressively invest in our implementation. From what I’ve seen MT is the only political player even outlining a game plan that I agree with, so maybe it’s time for the election.

      • The problem I have with that logic CB is that somehow you can predict the future and the skills needed. Lets say for arguments sake you did, and we trained a heap of IT people, although improved, our IT financial markets are too small, and they would all leave and go to the US. Similar thing happening in Europe – they are losing all their top engineers to the US. Because that is where the big VC funds are based, a bit in London, but way, way smaller (VC anyways – debt London the the biggest by far).

        Thats the fallacy of that logic, you cannot control life, nor destiny, you have to play with the best cards we have. We are more educated than ever, so we can have highly entertaining conversations with our barrister in the mornings.

        China is producing 3m graduates a year, and no jobs for them to do. They go back and work on the family farm, or try and get a cleaning job or something.

        Education is a bit of a Ponzi scheme – it gives you promises it cannot possibly deliver. In this modern society, we are all going to be increasingly under employed.

      • @RT No real argument, But what’s the alternative?
        In many ways it’s like managing the end-of-life of a product, everyone knows it’s going away nobody can say precisely when the business transitions to negative cash flow because the whole equation is influenced as much by the actions of others as by your own actions. You have two options,
        – distribute the profits while they last OR
        – Create a viable transition plan and use existing cash flow to fund you future.
        Unfortunately I see an Australia that has selected the first option and it’s disheartening to see so many especially within the SJW camp that so willingly/greedily accept this outcome. The meme : I dont know what to do so I do nothing is indefensible.

      • Don’t know… don’t have any answers… don’t get me wrong, education critically important. Kids seem to be doing really well at school – must take after their mother…

      • I’ve been saying it from the start – there’s absolutely no way that the LNP are going to an election with any changes to the GST. It’s always been Morrison’s idea (and only his) and will not become LNP policy.

        Turnbull has been happy to watch Morrison make an idiot of himself while destroying any leadership ambitions that ScoMo may once have had. Watch for Turnbull rule out any change to the GST in the next couple of weeks.

      • FiftiesFibroShack

        He basically ruled it out during the Insiders interview. But yes, we’ll know officially after cabinet goes through the motions.

      • Agree an unwinnable policy to take to an election, alas any policy to do with tax and or spending restraint is unwinnable. We the electors have made it so. We are ensuring a devastating legacy for our kids.

        I did like Henry Ergas in the Oz, go read the whole thing.

        “instead of advancing ­reforms that would put health, education, social security and ­defence outlays on a fiscally sustainable basis, Malcolm Turnbull and Scott Morrison have allowed the discussion to be hijacked by the tax addicts, who want the Coalition to cop the pain involved in raising revenues for the next Labor Government to squander”

  7. Come on Di Natale, get out loud on how you will stop foreign ownership of our housing stock and put the Laberal corporatists to the sword!

    • Di Natale is starting to sup with the devil, but you can’t get a long enough spoon to deal with the psychopaths in the large corporates now. You really need to make big changes but he doesn’t seem to be up for it.

      Labor with Penny Wong in charge would change the game, but the old man’s club in Labor is strong.

      • “Labor with Penny Wong in charge would change the game…”

        You must be joking. I used to respect her but then she tried out do Robb on selling off our country.

        Today the Prime Minister re-announced the Coalition’s planned register of foreign ownership of agricultural land and greater restrictions on foreign investment in agricultural land.

        Missing from today’s announcement were details of the Prime Minister’s promised restrictions on foreign investment in residential land, while the Liberals’ and Nationals’ commitment to increase red-tape on investment in agri-business got no mention at all.

      • Penny Wong couldn’t even stand up to her own party on gay marriage, an issue that should cut to her very core?

      • You have to be bl…y kidding? That is probably the person most likely to sell what remains of the country.

        It is clear Wong makes no distinction between selling the asset and investment – she is leading the charge to sell the farm.

      • Err…… I was referring to the Labor Party’s electoral fortunes. The economic future of this country has been set in stone ever since the majority of us decided to sell out our children’s future for our present comfort. Most of us want to be petit millionaires and support what is going on, why do you think the rule of law is breaking down in the financial industries ? The word is getting around to get yours while you can.

      • From the get go was that there was no rule of law or acceptance of the underlying morality of law in the Finance world. The only diff now is that the secret is out and systemic failure is at hand because the law can tolerate a few cheats but not all cheats!

  8. Let’s get some internal consistency in the narrative, please. If the housing market is going to crash, let’s sell as many houses as possible to foreigners as quickly as we can and buy them back more cheaply later. And lets do it before the currency crashes to the 60c/USD that people talk about because we are better off if we get more foreign currency for our houses than less, because more foreign currency allows us more purchasing power than less foreign currency.
    Of course, stopping foreign purchasers is what we should do if our houses are not going to crash or if they are going to go up in value both in AUD and in foreign currency. In tht case we should get as many young couples to buy as possible to set them up for life from the coming boom. Which is it MB commentators?

    • Buy them back? What with? As to foreign currency we just spend all the cyrrency we get from asset sales …and then some more!
      That’s the problem!

      • Buy them back with the money you got from selling them and your savings while you rented instead of making house repayments. If you have spent your capital no one can help you.

      • We are talking macro policy not individual financial planning. On a macro scale we spend all get from asset sales. We are not going to, quite suddenly, sprout a CAS which will give us the capacity to pay out whatever foreign currency is required. Yes I know we can print A$ but that gets converterd to a foreign currency to be repatriated. It’s likely by that timne our A$ will be even lower than now and further pressure will send it down further making the repurchase, probably, in terms of the foreign currency, more expensive than the original sale.

  9. Terror Australis

    A full Senate election on the current Senate viting rules (group voting tickets) would potentially throw up a Star Wars Cantina parliament even bigger than the current one.

    I think its highly unlikely.

  10. PMT? I like it. I guess even if Shorten becomes PM Australia is still going to be on the rag.

  11. Turnbull is corrupt.

    He wants the mass immigration of 457 visa workers to continue.

    He says the number of Aussies studying IT is going down so he wants more immigrants!

    Oh dear! The reason why we do not want to study IT is because the firms can just bring in cheap labour from poor nations on 457 visas and Aussies miss out on jobs.

  12. He can’t go to an election until parliament ticks off on the NSW redistribution (end of the month) as the pre-selection have been done on the new boundaries. It is already messy in the state and trying to revert to previous boundaries would be even messier.