REDRUM: Lunatic RBA slays economy

Policy error is the name of the game at the Australian central bank. Witness:

  • house prices in Australia’s two largest cities are in outright crashes;
  • it is spreading steadily to other capitals;
  • building approvals are crashing coast to coast;
  • infrastructure investment has topped out;
  • credit is swiftly falling towards zero;
  • the NAB business survey has crashed signalling the same for investment ahead;
  • PMIs are crashing, corroborating the NAB survey;
  • car sales are marching lower;
  • retail sales have stalled and posted an Xmas shocker;
  • leading employment indexes have rolled over sharply;
  • monthly core inflation is at 1.4 per cent and tumbling;
  • bank share prices are down 40 per cent as they deliver unprecedented mortgage rate hikes into crashing house prices thanks to rising funding costs;
  • trade inflows have tanked with domestic demand, and
  • a federal election economic stall is imminent.

The above array of ugly data will threaten negative growth for Q4 2018, from Damien Boey at Credit Suisse:

It looks unlikely that consumption contributed anything to 4Q GDP. At the same time:

  1. Real net exports deteriorated, subtracting almost 0.3% from quarterly GDP growth.
  2. Residential investment likely fell.
  3. Capex at best experienced anaemic growth.

Therefore, but for inventory accumulation, it is quite possible that 4Q real GDP contracted, following modest growth in 3Q. Real GDP growth is likely to significantly undershoot the RBA’s optimistic forecasts.

Our proprietary activity tracker reflects this logic. The tracker is a powerful contemporaneous, if not leading indicator of the cycle in core domestic demand (ie excluding lumpy mining capex). It is based on retail sales, credit, building approvals, the depth of the infrastructure capex pipeline, and various sentiment indicators. Updating it for the latest data, we find that the tracker has fallen to slightly negative levels, consistent with a sharp slowdown in domestic demand.

It’s odds-on that Q1 2019 will be more of the same. And Q2, 2019 carries guaranteed election weakness. This is more than an economic slowdown, it’s an economic stall and it’s going to drive an unemployment spike into a bursting housing bubble threatening a complete economic unwind. Not cutting now for some insurance is lunacy.

The RBA has not hiked rates at all in the cycle to deliver the above because it never produced a recovery of sufficient strength to do so. Now it is taking a crazy punt that it can prevent tumbling house prices from infecting wider activity using nothing more than the fictional forecasts of a vapid Futureboom! Talk about quixotic. Compare the above actual data with an RBA outlook that has become little more than a trailing six month moving average:

The central scenario is for the Australian economy to grow by around 3 per cent this year and by a little less in 2020 due to slower growth in exports of resources. The growth outlook is being supported by rising business investment and higher levels of spending on public infrastructure. As is the case globally, some downside risks have increased. GDP growth in the September quarter was weaker than expected. This was largely due to slow growth in household consumption and income, although the consumption data have been volatile and subject to revision over recent quarters. Growth in household income has been low over recent years, but is expected to pick up and support household spending. The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities.

The housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run-up in prices. Conditions have weakened further in both markets and rent inflation remains low. Credit conditions for some borrowers are tighter than they have been. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased to an annualised pace of 5½ per cent. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

The labour market remains strong, with the unemployment rate at 5 per cent. A further decline in the unemployment rate to 4¾ per cent is expected over the next couple of years. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. The improvement in the labour market should see some further lift in wages growth over time, although this is still expected to be a gradual process.

Inflation remains low and stable. Over 2018, CPI inflation was 1.8 per cent and in underlying terms inflation was 1¾ per cent. Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take a little longer than earlier expected. The central scenario is for underlying inflation to be 2 per cent this year and 2¼ per cent in 2020. Headline inflation is expected to decline in the near term because of lower petrol prices.

This mad gambit (or pathological optimism?) is the perfect encore to the RBA’s “dumb bubble”, an equally toxic punt that blew a housing bubble from 2012-2016 to float the economy over a mining investment cliff that the bank never saw coming.

Now we have what looks an awful lot like a deleveraging singularity developing at the very heart of Australia’s thirty year credit boom just as we run out of monetary ammo.

This is not good monetary management. It is crazed lurching from one bubble and bust to the next, cheerfully ruining hard working people’s lives along the way, laying waste to the political economy and incinerating the last of its own brand. The Kouk summed it up perfectly:

All work and no play makes the RBA a dull boy.



  1. Ridetheclutch98

    When one finds themselves on the same page as the Kouk, one should seriously examine the basis of one’s own analysis. I thought this housing bust was the cure we needed to fix the affordability and inequality gap. Yet you prescribe more lower teh rates nonsense that blew up this bubble in the first place?! My gawd man! Thank my lucky stars you’re not the one pulling the IR lever at the rba…because savers haven’t been punished enough, capital hasn’t been mis allocated enough, and leveraged housing speculators haven’t had enough capital gains! Your prescription of RBA monetary policy is everything that is wrong with our economy!!! Your belief that a further destruction of Australian purchasing power via a trashed currency blinds you to the fact our industry is already hollowed out and unlikely to return. Slightly increasing tradeables is not gonna be some panacea. The medicine needs to be swallowed. Now is a good a time as any. Hike the cash rate to 10% and let the market sort out whose been swimming naked.

    • No these commentators can accept the housing bubble for what it is and are now making reccomendatione to try and avoid absolute calamity and try and get this country out of the gutter. We need a much lower currency to try and rebuild and if we could try and achieve this while the rest of the world is not in the doldrums that would be a bonus. Finally I do not see lowering the rates having much beneficial effect on the housing market

    • Yes, NOT dropping the interest rate is the first correct decision that the RBA has made in a long long time. Short of using a time machine to go back 7-9 years (in order not to cut (or to hike) interest rates then), this is the best thing to do.

      Destroy the bubble. Double check it’s dead. Clean up the mess after.

      That was my prescription 10 years ago. If they’d listened to me, we’d be out the other side of the recession and flourishing by now.

      This is Just like planting a fruit tree. The best time to do it is many years ago. The next best time to do it is today.

      • Agents of chaos… I cant blame you if you have seen people over the last ten years make a fortune from houses and then gloating at the bbq that lifes easy, just invest in housing. But if you are hoping for 20 percent unemployment an broken people everywhere then maybe you are the ignorant one…… lowering the interest rate will not induce to great housing comeback. It will lower the dollar and change wealth from developers and importers to exporters.

      • maybe you are the ignorant one…… lowering the interest rate will not induce to great housing comeback

        Yeah right, Col. That’s what you (or your predecessors) said every other time the rate was dropped over the last 20 years. “…No way housing would bounce, the power of the deleveraging is just to great, blah blah blah….”

        You know what happened every time? How can you be so stupid or so deeply in denial? Even with HnH telling you that dropped rates will bounce housing. Damn!

        Cheaper money means more expensive everything, especially housing. It’s not rocket surgery. Never has been.

      • Peach flambe today, absolutely cooking them! Love your work.

        Like Junkyard says you need to save for a rainy day – speculating heavily with debt into a single asset class is nuts.

      • Ride – well said!
        We’ve been on the same page on this for many years peachy. There have been others some of whom have given up on the stupidity and left the site. We lost Reusa when he went feral! 🙂 but what a great beacon of light he has been shining light on the sheer lunacy of it all.
        Maintaining negative RAT interest rates has NEVER brought anything good. Almost by definition, lowering rates results in more and more debt – that’s exactly how we got to where we are. It is true that we run an over-valued currency – massively overvalued and underwritten by the sale of every resource and core industry that we can talk some foreigner into buying.
        So there are other very good sensible ways of getting he currency to a realistic level. Indeed we can raise the rates to encourage saving to pay off debt and invest in ourselves while at the same time running a currency value that, at least, balances the external account.

        If MB were ever serious they would have joined the discussion around the stupidity of these policies that were set loose by Keating et al and turbo charged by Howard Costello Rudd Duck et al. Farnkly, those of us who warned that reducing IR’s would blow a massive housing bubble were given the old rubbish treatment. John Stone, at the time of the Float of the A$, warned 36 years ago that we would end up in this corner that we now find ourselves. It’s surely time for some different thinking other than ‘Lower teh rates’ – well it’s time for SOME thinking.

        Unfortunately the moron side is not done with yet. There is much more moronic stupidity to comeon a scale we cannot currently envisage.

      • I had a boss years ago, who taught me, and insisted, that
        when in an entanglement like this
        set fire to it
        “anything valuable will make it through to the ashes”
        It works. too easy.

      • Dropping the rates will not stop this overpriced market from crashing anyway. The moral hazard of negative gearing is that it devalues work via currency dilution and the tax subsidy of Spivs. The recession is baked in thanks to the build up in debt. Beans and shot guns..

      • I’ve been through too many recessions in my life, they all hurt and they do nothing to prevent same happening again.

        Look at US, huge housing bubble just decade ago exploding into world’s face and now three or four bubbles just to explode again (one of them housing bubble again). Prices are where they were or higher, even places that used to be cheap like TX or GA inflated their own bubbles. Recession will come, wealth is going to be transferred to the rich again.

        That said, I think lowering rates would be a bad idea. It may save a year or more or less but make the suffering after much worse. Our best hope was to have bubble burst few years back when the rest of the world (USA and China) where doing fine. It looks like global economy is going to crash in a year or so so better pop our bubble ASAP so that pain doesn’t coincide with the global one. Maybe we can go through the worst before world implodes.

        RBA should hold and APRA should inflict credit squeeze and media should spread fear.

        Think of rates as saving that can be released to help ease the pain during recession. Once bubble pops, banks go bust we can than lower rates and AUD to use that released credit money for fresh start. If RBA lowers rates now we’ll just spend all of “the rainy day savings” trying to save the bubble not leaving anything for recovery.

      • Peachy,

        I agree.

        It is one thing to predict that the RBA will cut rates because goosing the debt machine is the only trick they know but applauding it is nuts.

        Not cutting rates is exactly what the RBA should be doing. That they are likely to capitulate in the near future seems very likely as there is a swarm demanding that the supply of cheap and easy money for their asset price speculations resume.

        What further evidence (and how many more Royal Commissions) do we need to get it through thick heads that the current monetary policy centric approach to economic management is fundamentally broken and reform is required.

        Interest rates are at record lows and the economy is showing signs of sagging yet clown like Kouk are calling for more of the same.

        Now is the time to start talking about an alternative approach to the operation of the monetary system.

        At the very least heavy regulation of bank credit creation to restrict and discourage unproductive lending that does not expand the productive capacity of the economy. i.e heavy restrictions where the security for a loan is existing property.

        If that requires another Royal Commission (instead of a bit of commonsense) then lets do it.

    • “Hike the cash rate to 10% ”

      Why? Just shut the central bank down and let the market decide — at least that way you get to find out the correct rate as opposed to one that’s been extracted from the depths of an over-educated ar$ehole.

      The issue is the monetary system and the control that the authorities exert over it. Nothing more. The authorities don’t interfere in the pricing of apples or beef or bananas or any other consumer good — and for good reason i.e. they wouldn’t have the first fvcking clue where the clearing price is. Money is a ‘good’ like any other, so how could they possibly know what the right price for that is? Answer: they don’t. And the proof is the laundry-list of ‘policy mistakes’ above.

      • Dominic,
        That is correct.
        However the elite are not trying to set the “correct” price for money.
        They are trying to use the monetary system to skim-off a benefit for themselves and their cronies.

        The system would be easily fixed (as in I would prefer it) by using gold as money. The gold supply tends to increase 1%-2% per year. Alternatively the elite could force us all to use some paper/fiat money system that also increases by only 1%-2% per year. That could work equally well, or better than gold.

        However the elite want to pilfer much more than 1%-2% per year, which leads us to the present system. They can so they do.

    • + 1 agreed, fine, take issue with the fact the RBA’s narrative seems way off and unsupported by alternative data. But to question the outcome??? Why on earth would we be advocating the RBA move on rates now given almost ALL evidence suggests the previously rate mistakes directly drove house price inflation (The tiny deflation of which that is now causing people to lose their minds).

    • I think I can confidently say now that WW2, was caused cos germany went tools down over an armistice in WW1
      Had Germany been flattened as in WW2,
      Maybe they would have though twice.
      So now we have an armistice over the mis behaviour of the FIRE sector
      history shows they need to be flattened.

    • There is no way cutting rates by 0.5% (what actually flows through to lenders) is going to do jack sh1t to house prices. Bloody good news will be needed to lift prices with all that is happening, people are slowly starting to realise the bs story they’re being given about how strong our economy is, is just crap.

    • I’m in with you guys. Dropping rates here is just like giving morphine to a cancer patient and saying everything is fine. Surgery and chemotherapy are needed here and it ain’t fun.

  2. Divide et impera

    Did a couple of minutes on the board members – they appear to be a rag tag bunch of Developers, Miners, Bankers – oh and a socialite / professional “member of boards” who is a Zoologist.

    It beggars belief.

  3. Spreading like a fire in flammable cladding stuck to the side of an Australian apartment block. Cracking up like a luxury Sydney concrete dog box. I have a feeling that the Australian economy and Salim Mehajer are linked in their destiny.

    How is it that such metaphors can exist? There must be a god after all.

    This could only get better if it was revealed that some of our key politicians drug people and rape them while they are slumbering in an economic and democratic delusion – Cosby style. But it does sound like a lot of people are waking up to the fact that that throbbing pain and burning feeling in their fundament had something to do with the Kool Aid were drinking at the debt party over that last 15 years run by the RBA, government and banking “experts”.

    • “the debt party over that last 15 years run by the RBA, government and banking “experts”.”

      “the debt party over the last 60 years run by the RBA, Treasury, governments of all colours, university economic faculties and Bankers”

    • Reference in 1980 movie The Shining. Which is, according to some film analysts, full of hidden theories and references.
      Native American genocide, Faked moon landing, the Federal Reserve.

  4. reusachtigeMEMBER

    Yeah they know nuffin. You all know what needs to happen, it’s the meme, and it works!

  5. Given the only tool left at the disposal of the RBA is the jawbone given an inability to move interest rates, treating anything said by them as anything other than propaganda intended to cause desired outcomes is ridiculous. Expecting factual propaganda is……

    • Good point. They probably know we will enter a recession at the end of this crash and will drop hard at the end to help us out but only after the housing boom is well and truly dead.

  6. Central banks have lost a lot of their mojo………it is up to the balance sheets of the big banks now, hence the clearing of the thickets in front of the banks They don’t want the risks on their balance sheets though, they want someone else to shoulder the risks. US Senior Loan Officer Survey showing that tightening is starting. All these reflation attempts fail one after the other because the banks can see that the risks outweigh any possible gains.

    Just looking how housing credit is holding up it is obvious that the big banks are funding the non-bank lenders to keep their sub-prime speculators alive for another day. Ginnie Mae in the US is already in over its head doing this with Quicken Loans and others.

    • central banks never had any mojo
      The whole Friedman, Greenspan Monetarism is just laughable – it “worked” for a while by blowing the debt and borrowing from the future until it destroyed the future it borrowed from. Evan a first year student with some critical mind can see how dumb the idea was to start with – Amazingly it’s just private capital neoliberal version of Keynesian economics – fundamentally based on the same false premises.
      amazing bit is that so many smart people blindly believed in to it – it’s like religion

  7. I actually like the fact that the RBA are hodling. I think I agree with JosephS and others here. It also feels better to not agree with the Kouk – but that is a side benefit.

    I think they are hopefully unwinding the expectations that they will come to the rescue of house prices.

    No more Home Ranger.

    • Jay
      I agree I think. It is possible the RBA are getting some ‘good’ background advice. (‘good’ as in within the confines of modern economic stupidity and its charter)
      If the RBA cuts nominal rates substantially it is unlikely, at this time, to cause much of a stimulatory effect. At the same time, as they look down from the unrealistic lofty heights of the value of the A$ they can see no bottom and are just peering into a murky black hole that might not have an end if they pull the interest rate plug.
      Clowns who think we cannot have inflation in this country really need to seriously do some maths and thinking on what happens when the currency halves in a short period. There will be inflation that will quickly run out of control. Perhaps the RBA, given its limited options, is doingthe only thing it can.

  8. Nice to see the Kouk weighing in at the end there — demands more ‘bubble’.

    We’re at the end of the line, you moron. There are no ‘solutions’ from here — just pain. Blame the RBA for getting us into this mess, sure, but there’s little point blaming them for not getting us out.

    • What gets me is housing starts crashing, population not slowing , and with that in mind, the point above “infrastructure investment has topped out”. Just how does all that play out in the big cities that take most of the population growth. It’s pretty bad now , but we’re in for no solution hell.

      • ErmingtonPlumbingMEMBER

        If they can politically “get away” with sustained high immigration, with this collapse in Building, then a bottoming out of property prices might be only a year or 2 away.
        No doubt Labor will embark on some pretty agressive stimulus/infrastructure spending when an official recession begins.
        Isnt a Governments economic track record mostly measured on GDP growth?
        All stops will be pulled once we are in Recession.

      • Let me bring you up to speed
        10% of the population are predators
        90% of the population is prey
        Predators are insatiable.
        should hunger threaten, obtain more prey.
        for prey, use the wilderbeast system, and stick to the middle of the herd.
        THAT is how it works.

      • @WW,
        “use the wilderbeast system, and stick to the middle of the herd.”
        So go long housing and debt, and don’t save a single penny.
        Have to say over all that’s been a pretty good strategy and despite the doomsayers probably will continue as such.

    • Jumping jack flash


      They are all acting on the assumption that if the RBA lowered interest rates the banks would pass it on.
      The banks have no intention of passing it on. The banks are currently raising rates independent of the RBA!
      The RBA doesn’t want to look like a fool and lower rates while the banks continue to raise. They have lost control of the banks, but they don’t want it to become obvious.

      I received a nice express post letter from my bank saying that my fixed rate unsecured personal loan was going to revert to variable rate if I took too long to repay it. There’s no chance of that, the amount is quite small, but it was interesting that they did that.

      Variable rates to rise soon, if not already.

  9. I think the RBA is trying to keep some form of confidence in the $AU because our banks are going to need more offshore funding to prevent collapse – it’s the only explanation I can see for them holding rates. They have basically written the housing market off and are now doing what they can to save bank lending in this country.

    • ErmingtonPlumbingMEMBER

      Whether debt is widely avaliable or not at the moment, the expectation that a major crash/correction in Property prices has some way to go will keep a lot of Speculators out either way.
      Why cut rates until perceptions are we are nearing the bottom of the correction.
      Raise the rates when Property prices are rising not falling.
      A simple fix would be to include property prices in the CPI inflationary figures.
      Its an absolute scam that the primary expenditure of a massive percentage of the population (mortguage payments on inflated property prices) isnt included in the CPI “basket”

      • So you think the RBA is, in essence, trying to catch the falling knife Ermington? Trying to pick the bottom is a dangerous game for an individual buyer/investor – to do it with a whole country is insane (hilarious, but insane).

        When do they lower? 25% down? 30%? 50%? How do they factor in dead cats bouncing and other economic anomalies with price crashes? What if our property cat falls so far it bounces like 5 times?

        I’m totally surprised by the RBAs response to the crash. That doesn’t mean I’m not enjoying how unpredictable and dangerous it is.

      • ErmingtonPlumbingMEMBER

        Sure,…Like whats included in the CPI basket IRs are arbitrarily set by those worthy of little trust.
        But they are still expected to follow some aspects of the narrative their mandate demands of them.

      • Jumping jack flash

        “Raise the rates when Property prices are rising not falling.
        A simple fix would be to include property prices in the CPI inflationary figures.”

        But then the game would be up before it even started, and where’s the fun in that?

    • I think you make a good point but when catastrophe strikes, rates are going 50bps. They will ‘kitchen sink’ it.

      US rates will be back at ‘zero’ sooner than people think and RAB cash rates at 0.50% is not beyond the realms of possibility. For sure, if the AUD were to plunge through 0.50/USD then they’d be up sh!t creek. What to do? (other than panic)

  10. TailorTrashMEMBER

    The opal tower is a great metaphor for the Strayan economy . Glittering glass on the facade held up with props (debt ) on the inside .
    It should really be torn down and rebuilt properly but no one can afford to pay or wants to take the pain . So we add more huge props to keep it up
    but they take up the living space in the overvalued apartments

    Straya needs to stop ,take pain and rebuild ….but that isn’t going to happen until like opal or some other sh1t built tower it all come down in a heap.
    Intrest rate cuts are like the props in Opal…. they might hold it up ….but is the much needed and very necessary reconstruction possible ?

  11. That’s OK don’t panic Mr PL will get a great job (which I believe is about to open up) at NAB

  12. We have been dicked over & manipulated by vested interests for decades, all determined to inflate land prices, facilitate unearned income, confect inefficient complex tax systems and use interest rates for short term spin. The only sensible thing to do is to act with simple rationality and let any losses lie where they fall.

    It is theft (from Creator & community) to speculate in land price or to privately pocket income from the value of sites or (above extraction costs with reasonable profit) from raw resources, both renewable & non-renewable. Humanity did not make the land or the raw resources and the owners do not give it value.

    The time for tinkering is over. An economy based on theft cannot survive. The only rational solution is to ditch all taxes and collect instead the annual rental-value of sites privately occupied, as sole source of public revenue. That will bring land prices to nil (+value of improvements), give labour independence & a strong base to bargain, and minimize any need for welfare state.

    Any loss to investors, speculators, homeowners or mortgagees must lie where it falls. Whether banks lose security and live or die, they must not be bailed out; credit unions can form locally. The power of RBA to manipulate interest rates must be ended let currencies float in free market.

    It does not matter if miners are foreigners. Extraction licenses would be granted (say for 15-year terms) to the highest public bidder, with royalty rate set to assay quality and minimum performance standards.At the end of term, the new successful bidder would be entitled & obliged to buy the mine infrastructure at written-down value.

    • You are certainly on the right track there.
      I’m pleased to see that more and more people can see why land and resource rents are the least damaging form of taxes.
      The danger is that this simple good idea becomes a religion a “one and only true” tax, something that is not only better but can solve all problems in one hit. The idea is not that good.

      You should note that the elite do very well from an absence of “land tax”. They make most of their wealth from increases in value of these government licenses that they “own” or “inherit” from their parents or convince government cronies to gift to them.
      The elite will fiercely fight against land and resource rents. They will always claim to be fighting to look after the poor people, or old grannies, or market-gardeners, or such. Don’t be fooled. They fight these fair concepts for their own private gain and greed.

  13. PassingInterest

    Are you gents just talking your own book ?

    Does this country ever need a re-set. You’ve been saying it for years now.

    No making an omelette without … etc.