The rest of the world is increasingly seized by the notion of “global synchronised growth” but Australia looks increasingly like the odd man out. How did it come to this?
To understand, we need a little history.
MB has tracked from its inception the epic macro-economic mistakes made by Australian authorities. Here I list them:
- in 2009 the Rudd Government did a good job of simulating the economy but the Cabinet overruled Treasury and added home buyer grants that entrenched the housing bubble;
- from 2009-2011 fiscal authorities failed to tighten enough forcing the RBA to drive up the currency to astronomical highs, entrenching in markets the belief that Australia would never join the global currency war;
- the RBA then went too far in the belief that the mining boom would last thirty years, especially gas development which fiscal authorities allowed to run wild;
- at the height of this madness fiscal and monetary authorities killed the car industry just as the 30 year mining boom ended in two;
- as the mining boom went bust much earlier than our geniuses expected, they pressed the panic button on the housing bubble, ramping it to astronomic levels on unsustainable interest-only debt and hosed off any attempt to bring sanity to it via macorprudential policies;
- fiscal authorities did nothing as Chinese criminals entered the boom driving it even more wild. Indeed they egged it on by raising immigration to crazy levels;
- now the Australian dollar stopped falling and started rising far too early for any real economic recovery;
- household debt ballooned above 200% of disposable income and the RBA and its captured brethren at APRA were humiliated into a macroprudential backflip to contain the blowout;
- meanwhile business was smashed by huge energy costs price rises as the gas mining boom turned exports into a domestic shortage;
And so today we are unable to tap into a global boom because we have household balance sheets that can be stretched no further and poor economic structure overly reliant on commodities that has led to a chronically high dollar and hollowed out non-mining tradables. Throw in historically low wage growth, poor consumption, weak investment (despite the hype) and low productivity plus a Government desperately building poorly planned and executed infrastructure projects just to keep growth going even as everyone is going backwards.
It is all of our own doing. At each turn all we needed to do was to manage the real exchange rate and household debt:
- less bubble under Rudd would have meant lower interest rates and dollar as the mining boom took off;
- more fiscal tightening and less RBA would have given room for the mining boom without the need to drive the currency mad;
- we would not have lost the car and other non-mining tradable sectors;
- when the boom went bust we could have lifted fiscal spending, installed macroprudential and cut rates so that house prices did not take off;
- we could have stopped Chinese criminals from buying the housing market;
- household leverage could have been contained and the AUD have fallen much lower throughout, and finally
- we could have prevented the energy shock.
MB advised all of this in real time as it transpired and it was ignored in favour of easy answers and can-kicking. The result is today the economy is the poxy leper rolled up in a ball in the corner of the global party.
Will it stay that way?
It’s become obvious in recent weeks that the US economy and markets have dragged their anchor. They are now moving into an outright boom in which quaint notions of valuation, multiples or risk are temporarily forgotten. All indications are that this blowoff phase could take everything higher, as Ray Dalio said yesterday at Davos:
We are in this Goldilocks period right now…inflation isn’t a problem, growth is good. Everything is pretty good, with a big jolt of stimulation coming from the changes in tax laws.
We’re at the latter part of the cycle… we’re going to have a jolt of stimulation into that. And there is a lot of cash on the sidelines, I don’t just mean investor cash, I think banks have a lot of cash, corporations have a lot of cash – so we’re going to be inundated with cash.
I think that’s going to produce a lot of stimulation and perhaps a market blow-off. We’re in a situation where if you’re holding cash, you’re going to feel pretty stupid.
This boom is going global via a falling US dollar that is channeling a capital flood into emerging market equities. This is being exacerbated by a suddenly strong EUR and JPY, as well as by US authorities talking it down. Both of those economies are firing up on domestic demand. The US is still a massive economy and will begin to suck in imports as well.
In short, the Trump boom is overtaking all of them.
In any historical cycle you care to mention, Australia would be following and interest rates would be set to rise. It is a measure of how badly we’ve allowed our economic structure to deteriorate that this is not a foregone conclusion. There will still be channels of influence. The stock market is lagging badly but it is being dragged along like a half dead donkey. We’re going to see personal tax cuts mid-year. Animal spirits here may be lifted by the global tide.
But the key is commodity prices. Without them we are nothing. That’s our new reality, only dirt can lift income, and it will be the arbiter of whether or not we join the global boom. That question boils down to a battle between slowing Chinese demand and the tailwind of a falling USD.
We maintain that China will slow enough this year to prevent a commodity bull run. Indeed, we see prices falling. Its tightening is well ahead of the global curve and will bear down on growth if it is allowed to. As well, CNY is rising so there is no reason for China’s mad traders to stockpile even more commodities on the falling USD.
But these are rational arguments. China, too, could get sucked into the irrational exuberance of the Trump boom. Our odds for this are one chance in three.
To close I’ll make only one more point. These scenarios don’t change our allocations. We’d still recommend US exposure over local given the falling USD will drive asset prices much higher than any appreciation in the AUD which weigh heavily on local assets.
Today, Damien and I are conducting a debate on these vital questions in a webinar titled Can 2018 Trump 2017? at Noon today. All are welcome.
