Lunatic shadow RBA demands hike

All care and no responsibility as usual:

Shadow Board’s Conviction that Rates Should Remain on Hold Strengthens

Australia’s economy is not showing a clear direction. CPI inflation, most recently equal to 1.8% in the December quarter, remains below the Reserve Bank of Australia’s official target band of 2-3%. The official unemployment rate is steady at 5%. Real wages growth ticked up marginally; however, consumer and business performance and confidence measures paint a mixed picture, while the housing market is extending its slump. The RBA Shadow Board strengthened its conviction that holding the cash rate constant is appropriate while the bias towards a required increase in interest rates is lessening. More specifically, the Board attaches a 62% probability that holding interest rates steady at 1.5% is the appropriate setting, while the confidence in a required rate hike equals 35% and in a required rate cut equals 3%.

Recent data from the Australian labour market are positive. According to the ABS, the seasonally adjusted unemployment rate in Australia is unchanged at 5%. Encouragingly, in net terms, more than 65,000 full-time jobs were filled (total employment increased by 39,000), and the labour force participation rate edged up to 65.7%. The latest nominal wage growth data for the December quarter showed that it clocked in at 2.3% (annualised), unchanged from the September quarter. Thus, in real terms, wage growth in the December quarter has ticked up to 0.5%, which is still less than estimated productivity growth.

The Aussie dollar (relative to the US dollar), after testing the psychologically important floor of 70 US¢, rebounded and is now trading between 71 and 72 US¢. Yields on Australian 10-year government bonds have continued their fall, to 2.1%. The Australian share market, on the other hand, extended its recent gains, with the S&P/ASX 200 stock index approach the 6,200 mark.

Numerous international organizations, from the International Monetary Fund to the Organisation for Economic Cooperation and Development, are gently revising their 2019 outlook for the global economy down. This is in spite of financial markets continuing their new year rally and posting to new highs. The risks to the global economy remain much the same: the US’s fiscal boost from the Trump administration’s tax cuts will likely wane; Europe’s economies, including Germany’s, are weakening; emerging markets, especially the highly leveraged ones, are susceptible to the shifts in sentiment in financial markets. Furthermore, political instability and geo-strategic tensions do not seem to be abating any time soon.

Consumer and business performance measures do not show clear trends. The Westpac Melbourne Institute Consumer Sentiment Index rose from below 100 to 104 this month, whereas retail sales contracted 0.4%. The NAB business confidence index and the manufacturing PMI, improved slightly, however, the AIG Performance of Services index dropped to its lowest level in more than three years. Overall capacity utilisation in the economy also dropped, to 81.45%.

The real estate sector is continuing its retreat from recent peaks. Building permits are down 8.6% December, after having contracted by 9.8% in November. Construction output declined 3.1% in December, the January construction PMI recovered slightly (from 42.6 to 43.1 in January), and the number of new home sales, equal to 4,622, is the lowest it has been in 10 years. The consequences of this downturn in the housing market, e.g. on consumption and investment, have yet to feed through the Australian economy and will be closely considered by policy makers. The RBA has shifted its official rhetoric on interest rates, removing the upside bias and signalling that an interest rate reduction has now become a real possibility. However, as was already pointed out in earlier shadow board statements, house prices remain much higher than they were three years ago, and, taking a longer term view, a measured correction in house prices is necessary to avoid further household indebtedness.

The Shadow Board’s conviction that the overnight interest rate should be held constant is strengthening. The Board is 62% confident that keeping interest rates on hold is the appropriate policy, up 6 percentage points from the previous month. It attaches an unchanged 3% probability that a rate cut is appropriate and a 35% probability (41% in February) that a rate rise, to 1.75% or higher, is appropriate.

The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 1.50% equals 34%, five percentage points up from the previous round. The probability for an interest rate decrease has increased from 11% to 20%, while the probability attached to a required increase has fallen from 60% to 46%. The numbers for the recommendations a year out paint a similar picture. The Shadow Board members’ confidence that the cash rate should be held steady grew six percentage points, to 22%, while the confidence in a required cash rate decrease equals 17% (11% in February), and in a required cash rate increase 61% (73% in February). The width of the probability distributions over the 6 month and 12 month horizons narrowed slightly, extending from 0.75 to 3.25.

It wasn’t easy to make themselves worse than the actual lunatic RBA but they’ve managed it.

Comments

  1. I dare the RBA to hike. I will gladly watch the AUD go nuts for a few months to then watch the entire economy based on ridiculous amounts of debt explode.

    • We are on the same wavelength, Timmeh.

      HIKING rates, rather than lowering rates, is actually the best way to achieve the MB-nirvana of a materially lower AUD.

      If RBA goes on a hike cycle, then once the short term bounce in AUD is finished and FX traders realise that the bank has decided to destroy the bubble-economy and start again, the AUD will be sold. Hard.

    • I’m not all that convinced the AUD would actually rally that much — the market knows ‘what time it is’, to wheel out some street slang.

      A hike in rates would be short-lived in everyone’s mind but the geniuses at the RBA. In the US the market started pricing in a pause/cut in FFR before announced the pause. The market knows.

  2. This article (in the link below) argues that global low interest rates are not driven by recessionary / QE responses – but were a long term underlying trend prior to GFC/ US recessions etc.
    Excerpt:
    “Taken together, our results suggest that low interest rates in advanced economies are a secular phenomenon driven by global forces that emerged well before the Great Recession and that are unlikely to be connected to country specific factors, such as national policies or other domestic developments.
    Therefore, whatever forces might lift real interest rates in the future must be global, such as a sustained pickup in world economic growth, or a better alignment between the global demand and supply for safe and liquid assets.

    https://voxeu.org/article/global-trends-interest-rates

    The US, the engine of global growth is going gangbusters. Dow up 40% since the end of the dark era of Obama total failure.

    Normally Australia would rise in synchronicity, but this time Australia is badly ‘misaligned’.

    A commodity economy with falling commodity prices and our exports under threat from existing & new competitors, including the US in any inevitable China & ‘trade balance’ deal plus North Asia (Korea, Japan, Taiwan) paying for US protection in US imports.

    There is nothing we trade to China or north Asia that USMCA (North America trade pact) hasn’t got a better & much cheaper supply of – plant, ores, minerals, gas, food or anything else.

    A falling dollar, falling wage growth and our GDP per Capita falling in real comparitive terms.

    Real unemployment of over 10.3% – 1.3 million Australians plus 1.1 million Australians seeking work. Roy Morgan February 2019.

    116,000 Australian permanent homeless & 360,000 without affordable housing.

    The core nutrient?

    Not so much the 1.9 million PR.
    That’s been a gradual intake. Sure 78% are third world unskilled highly dependent, but that was within our capacity to absorb.

    The core nutrient is 2.561 million non resident migrant guestworkers.
    Nearly 14 years of PR intake.

    It was 2.431 million at March 2018 & has grown nearly 6% in the last year.

    Fact check.
    https://www.vsure.com.au/many-temporary-residents-working-australia/

    The DHA links at the bottom of the Vsure link show the migrant guestworkers country of origin & visa category/skill level being majority third world & unskilled.

    It will be 2.6 million in July 2019.

    These non resident migrant guestworkers have literally ‘hollowed out’ the Australian economy.

    🔻Driving down wages.
    🔻Driving down productivity.
    🔻Driven an indebtedness ratio of 192% to income for Australians in mortgage and other debt – as Australians were forced to compete with over $80 billion of foreign dirty money laundered in by foreign criminal syndicates.
    🔻Washed in thru their migrant PR proxies – evading the FIRB and purchasing up to 1 in 3 dwellings / over 460,000 existing very modest low level units or small houses in just Sydney or Melbourne alone – to house at ratios of 7 or more the 2.56 million third world unskilled migrant guestworkers.
    Who rent (where do people think they all live & how)

    We have 1.3 million non resident migrant guestworkers in Sydney.
    1 in every 4 persons.
    And 1.0 million in Melbourne, 1 in 5 persons
    And another 250k elsewhere, mostly other state capitals.

    They live in cash in hand high density (3 or more times normal occupancy density) cram housing bunk share.

    An 800 sq km of Sydney stands as testimony to this – a vast swathe from Mascot in the South, thru to Zetland, south east, the CBD, along Broadway, the inner west, fanning out to Rhodes, West Ryde, the north west, the central thrust is west – Burwood, Strathfield, Lidcombe, Auburn, Granville, Parramatta, way out to Penrith and the south west spur – Villawood, Lakemba, Canterbury, Bankstown – all a massive third world migrant guestworkers slum.

    Guangzhou meets Mumbai, Cairo & Dhaka.

    Displacing Australians jobs.
    Lowering our standard of living.
    Overloading our public transport.
    Destroying our education system, as it prostituted itself as a migrant guestworker visa alibi.
    Driving Australians onto the street or to flee to the rural towns, with no jobs to eke out a living on welfare.

    There can be no wages growth with 10% of the population being adult third world migrant guestworkers & 18% of the total workforce – many working illegally on well below award rates.

    Options ?

    🔹An Interest rate cut (political election cut) – $Aud falls, cost of imported food & parity pricing in fuel / energy & living costs go thru the roof.

    🔹Interest rate rise (post election to hold the Aud up) and that will be like a bird strike into a jet engine – the Australian domestic housing sector flames out and the entire stricken debt burdened artificial price bubble falls from the sky and explodes, incinerating the banks & the economy.

    🔹Increase migration then?
    The government has been, despite their lies & rhetoric- if rose 5.7% in the last year. (TR + 130,000 & PR over 210,000) = 340,000.
    The vast majority being very poor third world unskilled who just add to the welfare, illegal work & illegal housing burden.

    🔹Decentralisation? Migrants to the regions.
    No jobs to steal. 18% real unemployment. 40% youth unemployment.

    -/-

    My suggestion?

    Face up to the root cause & deal with it.

    Normalise Australia back to OECD standards in migrant intake & visa controls.

    Reduce the PR intake to under 30,000. That would be a normal OECD Australian pop level recessionary level intake.

    Visa enforcement on the TR non resident migrant guestworkers.
    Exit at least 1.4 million non resident migrant guestworkers in visa breach who should never have been allowed in.

    🔻Criminal repatriation treaty.
    🔻Criminal proceeds sharing treaty.
    These are both needed.

    Then a police & ATO driven national housing audit. Start in Sydney.

    Most of the foreign criminal syndicates and proxy owners (most are PR on non Australia passports) will flee or fold.
    Their housing seized as settlement in back tax due & proceeds of crime.

    That will recover at least 400,000 ex a Australians dwellings purchased via a PR proxy with foreign criminal money and run as migrant guestworkers cash in hand sublet – with over $20 billion of back taxes on falsified rental income & false NG claims in the last decade made by the foreign criminal proxy.

    The ‘sharing of criminal proceeds agreement’ then splits the proceeds of that recovered housing asset plus cash & all the other proceeds of crime with China, India, Korea, Taiwan, Malaysia etc.

    That housing reclaimed can then re-house at least 1,200,000 Australians (3 per dwelling normal occupancy) into this seized & nationalised housing.

    ▫️it stops the foreign criminal syndicate money laundering & occupancy fraud in its tracks.
    ▫️Over 2 million migrant guestworkers will have no bunkshare housing and be out on the street, at least 1.5 million can be exited, the other million forced into legal housing with location tracking and mandatory reporting to the local police stations on their activities & accommodation (as per China).
    ▫️Rents will fall to normal levels of affordability.
    ▫️Wages will go up. (Australian Jobs & wages reappear from the murk of the foreign run black economy)
    ▫️Productivity & skills will go up.
    ▫️Education is refocused to be an Australian citizen priority & entitlement.
    ▫️Our cities will be cleansed of the non assimilated migrant guestworker slums.
    ▫️Congestion on public transport will disappear. 500,000 cars off the road.
    ▫️Major unneeded taxpayer funded public infrastructure projects costing tens of billions can be shut down.
    ▫️Environmental, power & water capacity is rebalanced, emission targets are achievable without community penalty.

    Housing values will fall but stabilise to a normal price level value (about 50% of current value) as the now nationalised ex foreign criminal housing has a legal rent income stream as debt security – and an asset to be sold off later as housing prices recover.

    That would deal with the $80 billion plus laundered into our economy.
    Australia would gain some $40 billion of it, plus tens of billions in taxes due.

    And it would remove a very large part of the 2.5 million migrant guestworker burden on our economy.

    • @mike mb this thorough and well thought out treatise needs to be wrapped up into an Australian ‘NEW DEAL’. A ‘NEW DEAL’ for Australia would demonstrate a political party and bi-partisan support for new strategy for Australia. What do we have now….zippo, nothing…..

    • As I mentioned here yesterday, on the weekend I walked past two middle aged Indian men speaking Hindi (or something) and stacking shelves at Woolies on the weekend.

      Why the fcuk are we importing Woolies shelf stackers? Do we need more unskilled labour in this country? Is it in short supply? It’s insane and infuriating.

      • We also have a skills shortage in the trolley-collecting industry, so we’ve imported thousands of foreign trolley pushers. There are a couple at each suburban Coles and Woolworths, across the country.

      • Folks that have *some* security through larger families will not work for that little.
        Immigrants, fresh immigrants have no such luxury.

        Why would local ‘mate’ work for petty money when he can invest in RE and and earn years pay at Coles every month?

        Supermarkets welcomed that with open hands… for them it became a barrel shooting contest. At least now someone educated does the shelves with enthusiasm.
        It’s called ‘situation exploitation’.
        Wait until the RE bust takes a full swing with blood all over the place… People will pay Coles to work on shelves so that they can get employee price on food.

      • They’ve definitely graduated from trolley collecting to customer service, shop floor type roles in every store in our neck of the woods. All with the SDA backing of course.

      • Jobs that used to give 16 year olds some pocket money and independence. Good luck with that now. X box it is.

      • Not related to what you said or the article..I just had to post. I’ve been trawling through old posts I’ve made on the internet for another matter and I found an interaction between me n you on Riotact.

        Small bloody world.

      • @FN I hope I was polite. 🙂

        I hung around RiotACT for quite a while about ten years ago, but after JohnBoy was ousted in the Palace Coup it got very dull very quickly. It miss it though, there were some very smart people contributing there and it was worthwhile reading, as is the case with MB.

    • Jumping jack flash

      Indeed interest rates were manipulated in the late 90’s to avoid a US (global) recession caused by reckless investment. In order to do that many things were changed and ignored that shouldn’t have been.

      Now the underlying problem that nobody seems to recognise is the debt that occurred as a result of that.

      I read an article by Rossy G this morning on the train and pretty much everything he observed that was “odd” and “new” and “uncertain” could be rationalised completely by the enormous amounts of debt everyone has to repay now, that nobody had a few decades ago.

      However these guys all went to the same school and must have been taught that there is nothing wrong with debt and to never say anything bad about the masters of debt – the banks. Of course there isn’t anything wrong with debt – if it is productive debt that boosts income by at least as much as the interest on the debt that was created to achieve those income gains. What we have is a mountain of debt that has been attached to unproductive stuff – houses and other trinkets.

      In short, there is no magic, just hard work and lots of it, for seemingly little gain. Unfortunately nobody wants to work hard and everyone wants to get rich quick with no effort. Then, most recently, everyone saw the effect of property price inflation as debt was added and kind of thought that it really was magic happening, and somehow, magically, houses were just rising in price, and suddenly instant riches were within everyone’s grasp.

      But its all debt and it needs to be all given back to the bank, plus a bit extra for the interest. So whatever you decided to spend the debt on better be able to generate enough income to cover the interest (without more debt being added!!), or you have to take that interest from something else.

      Its pretty simple, really.

    • Sorry Mike but this concept of a ‘secular trend’ toward lower interest rates is nonsense, even if widely accepted these days in economic circles. It is a phenomenon that is very easily explained but just not by modern economic models, which is why economists have been scratching their heads over the development.

      In short, a debt-based money system creates money (credit) out of thin air and expands the money supply in the process. The money supply expansion shows up as deposits in bank accounts — what Ben Bernanke famously referred to as a ‘savings glut’. This, so called, savings glut has the effect of downward pressure on interest rates — a simple economic relationship i.e. supply swamping demand.

      When a crisis arrives money supply growth will decline and even go negative which causes this glut to evaporate — just when banks need liquidity most — and interest rates rise. Rising interest rates in a crisis? No can do. Enter central banks to squash interest rates. There is no secular trend toward lower interest rates — it is an artefact of the debt based money system.

      • Agree that fiat money plays a large part but also I think the change in demand is also a core factor. When there was a big change in the rate of demand by baby boomers families interest rates spiked but as the rate of change slowed rates fell as the change in demand fell (less families at peak spending), lax fiat money/debt was the kicker which has led us to negative interest rates.

        Edit: the change in the rate of demand is what is causing Mike’s structural decline

      • bolstroodMEMBER

        I do wonder wether the debt explosion is the only way to cope with the human population explosion.
        Under the pre debt bomb rules there would not have been enough money to go around.
        Then again I am not an economist.

  3. reusachtigeMEMBER

    Sad but true. With all the signs of the new boom hitting us now all at once unfortunately we’ll need rate raises to cool things down. I’m prepared, but I don’t like it because only Lower the interest rates, that will fix thing.

    • …or, for something to go down must go up first!

      the more they go up, the more they can come down later with the new boom cycle that is lurking around the corner.
      50yr long corner.

  4. Isn’t the purpose of a Shadow ‘Anything’ to question the status quo? Make it consider aspects ‘outside the box’ in case they’ve been overlooked? I’m not sure the Shadow RBA is recommending much, other than to pose alternative thoughts to what is being done/considered. ( Think, SaxoBank and their yearly forecasts!)

  5. I kinda agree with them.
    They have a problem that the stick they are holding is not very big (it’s actually the smallest stick they’ve ever held) and the process of shedding the weight of their big-stick hasn’t made them more agile
    So what are we left with at the RBA
    A slow moving dinosaur that believes in Keynesian Fairy tales and Monetary policy,
    so what should they do?
    I’d say they’d be well advised to try and find a bigger stick, just in case they really need to use it.
    What’s coming our way in 2020 will not be avoided by 0.25% tweaking of the official rates, it’s locked and loaded and what’s worse it’s structural, so it’s time to look beyond this current stupidity and start getting yourself setup for what comes thereafter.

    • proofreadersMEMBER

      There is nothing equitable about the godbotherers at the RBA? It’s straight up the anus again soon for savers?

    • Jumping jack flash

      “What’s coming our way in 2020 will not be avoided by 0.25% tweaking of the official rates, it’s locked and loaded and what’s worse it’s structural, so it’s time to look beyond this current stupidity and start getting yourself setup for what comes thereafter.”

      +1

      Besides, anything they do will only affect the banks and do nothing for the people who actually make up the economy. The tail is well and truly wagging the dog, and has for some time.

      The people carrying around the enormous mountains of debt that underpin our new economy aren’t going to benefit from QE, or ZIRP. Their debt will never be at 0% interest, or generate income for them (at least not without adding more debt!).

      Look at it the other way: Are banks ever going to be able to fill the shoes of the consumer after they’re tapped out on their debt?

      • I think we need to go back to square one and remember what was the original logic behind managing our economy through Central Bank Interest rate mechanisms?
        Blowing asset bubbles is not suppose to the idea behind managing interest rates and supporting existing bubbles asset is most definitely path towards a better functioning 21st century Aussie economy.
        So why again are we talking about further reducing Interest rates that are already at historic lows?
        I think it’s time for Australian Central Bankers to crack open some 1950’s textbooks and take a long hard look at the chapters on “Industrial Policy” we’re probably F’ed if we do go down this path WTO rules and all that BS, but make no mistake about it we’re F’ed if we don’t

  6. they are wrong, RBA should just sit on a side and watch – that’s what they are doing anyway because they cannot cut before elections

      • Yep I reckon. And if housing needs “saving”, RBA wants it via govt stimulus not interest rate cuts. If they do nothing prior to election it kinda forces the government’s hand.

  7. They might be looking at a worn lever, but at least they are being honest about what drives housing prices. “However, as was already pointed out in earlier shadow board statements, house prices remain much higher than they were three years ago, and, taking a longer term view, a measured correction in house prices is necessary to avoid further household indebtedness.”

    • It’s their idea of a “measured” correction in house prices where they’ve lost the plot. If they hike rates, the bust will be “measured” in terms of millions unemployed and millions losing their house.

      • Why have they lost the plot?

        A mere 7% (or whatever) off absolutely unprecedented bubble highs is pretty measured. Given that the bubble stupidity was caused by too-much too-cheap debt, less-much and less-cheap debt seems like a pretty common sense approach.

      • I agree the correction to date remains “measured” in the sense of modest and moderate. I disagree with the Shadow’s implication that a rate hike now will ensure a “measured” decline in the long term.

      • Surely the answer is to address the structural failings not just pour endless debt into the thing. Although that said the political answer will prob be to pour more debt in. (I wonder where all that endless MMT debt will end up lol.)

  8. The problem with a policy of masterly inactivity is that eventually events overtake you. ( See Mr Turnbull for an example ) In the short term the condition of the US economy could catch them out.

    http://moslereconomics.com/2019/03/04/construction-spending-auto-sales-personal-income-and-spending-trump-on-the/

    In the long term it looks like the Fed has decided to slowly lift the currency in circulation up to match their monetary base instead of the opposite that they were trying until the last quarter. It will take a while but this can only be bad news for bond markets after this coming slump.

  9. JosephSMEMBER

    Did we even read the same analysis?

    “..the bias towards a required increase in interest rates is lessening..”

    How does that = demanding a hike?

    • Yes,

      There was definitely a whiff of dove dust.

      Apparently you are a hawk unless you are out shouting the Kook in demanding rate cuts to save the FIRE sector model of a vibrant thriving porcine economy.

    • reusachtigeMEMBER

      Who let this guy in? You can’t go calling out the #fakenews and #alternativefacts that go on in here. People need them to jack off in the morn!

  10. Insane?

    Any other day of the week this sort of stuff is considered Yoda-wise.

    “…earlier shadow board statements, house prices remain much higher than they were three years ago, and, taking a longer term view, a measured correction in house prices is necessary to avoid further household indebtedness….’

    There are plenty of policy options for encouraging productive investment and economic acitivity other than cutting rates, the choice of policy flabby guts and the weak of ham.

    • “There are plenty of policy options for encouraging productive investment and economic acitivity other than cutting rates”

      Quite. Indeed, cutting rates has a 20year track record of continually NOT encouraging productive investment, and crowding it out. Might be time to try Something Else (тм)

      • maybe giving 50% tax discount on productive investments and taxing unproductive housing investments at full rate

      • Yes. I am quite partial to the tax system differentiating between real investment and speculation.

      • Haroldus,

        At the margins there may be some grey zones but there is plenty of low hanging fruit.

        Investment in New housing – productive and worthy of encouragement in the form CGT discount, depreciation etc.

        Investment in existing housing – not clearly productive therefore no encouragement

        Just making that distinction in one asset class would have a huge impact.

        Likewise in other asset classes like new plant and machinery, new infrastructure etc.

      • new housing is not productive – it’s just new spending because a new house doesn’t produce anything
        saying that new house is productive is like saying new car is productive
        new car factory that’s something completely different ….
        existing housing on the other hand is even worse than spending, more like demolition

      • doctorX,

        ??

        Housing investment is productive unless you think that people are productive when they are homeless or living in old, damaged, unhealthy, crowded and expensive housing stock

        Investment in new housing is generally productive. even though in the current population ponzi deregulated speculation environment we have seen some crappy housing being built.

        Investment that merely bids up the price of the existing housing stock (especially old, damaged and unhealthy housing stock like Western Suburbs fibro) is unproductive.

        By the way even new cars can be productive if your old car breaks down, is expensive to maintain and delivers you to work stressed out and irritated but they would fall closer to the grey zone (especially if your existing car gets you from A to B perfectly adequately) and would rank in priority behind abundant housing and investments that expand the productive capacity of the economy.

  11. The Fed raised interest rates in the face of the 1920/21 Depression.

    The when? Yes, the 1920/21 Depression, not the 1929/31 Depression.

  12. Finally getting a bounce in sales at my SME. Customers are committing to new and forward orders at higher prices due to A$ drop last year.
    One swallow doesn’t make a Summer but the best month in 6 months is a relief!

    Perhaps the worst is over for now? A contrarian approach to interest rate moves from the Shadow Board may be right for them to make such a call.