Phil Lowe, “blind Freddy could’ve told you things are going south”

Let’s do a little roundup of today’s economic pet shop starting with some terrible analysis from Deloitte at the New Daily:

Some downturns are big, and some are small,” said Geoff White, head of real estate at CoreLogic.

“Usually, it’s driven by economic conditions, but in this case it’s more about credit.

…During the GFC, banks were still prepared to approve loans, as the federal government’s bank guarantee – where the government underwrote the banks to boost confidence – kept credit flowing, while the first homebuyer grant stoked demand.

The tightening of lending standards – especially to property investors – coupled with increased stamp duty for foreign investors, have combined to cause the sharp market decline.

“We’ve had a GFC, we’ve had recessions and yet we’ve still seen the market rise,” Mr White said. “It will always dip and dive, and it depends on the severity.

“This time the economy, across Australia in most major centres, has been performing well. Unemployment is low, inflation is low, interest rates aren’t high. There are great periods of growth and there will be falls.”

…one commentator argues that economic conditions this time around should make homeowners feel more confident than they may have been during the GFC and the ’80s recession.

Not only is the economy strong enough to weather the storm, but Deloitte partner Nicki Hutley told The New Daily their analysis shows that wages are going up “albeit slowly” and people are still spending.

“When people say it’s the biggest downturn, it was preceded by the biggest upturn.

“In Sydney, for instance, we had houses going up 75 per cent, so for the bulk of people who brought in last five years they’re still ahead of the game,” she said.

Ms Hutley stresses that the drop-off in investor lending is nowhere near the extent of what happened around the GFC and that “things are going in our favour”.

“The biggest risk to Australia is not internal but external – China is the biggest risk at the moment, but even there the government is acting to bolster the economy through fiscal stimulus.

“I’m far less worried about internal [circumstances]. We’ve got good employment rates, there’s income growth, it’s slow but it’s growing and that helps consumption. Thing are going in our favour.”

Similar poor analysis is available from Jess Irvine today.

I hate to break up the love-in but Australia’s external accounts are booming. Our problems are ALL internal. This simple truth is illustrated by relative PMIs. Everywhere outside of Australia is seeing an export-led industrial slump in growth with domestic activity in services holding up well:

But Australia has the opposite. Both export volumes and income are trending higher, industry is OK, while domestic services activity plunges:

It’s house prices, stupid. They are dragging down consumption and construction. If there is no intervention to stabilise the market then Australia will crash into recession in H2 this year while our Chinese connection is booming.

That has others arguing that all will be fine with a helping hand from gubmint, via Bloomie:

…The government has legislated some income-tax cuts and said in its mid-year fiscal and economic outlook it has about 0.5 percent of GDP penciled in for “decisions taken but not yet announced” — widely regarded as a nod to further giveaways.

Michael Blythe, chief economist at Commonwealth Bank of Australia, expects the RBA to keep standing pat and says the government should step in.

Similar is argued by Industry Super economist Stephen Anthony at the AFR:

Mr Anthony said the Reserve Bank of Australia should “sit on its hands”.

“I don’t want to hand out an opportunity of largesse to politicians who will take any opportunity to spend, but it is time to bring out the fiscal cannon,” he said.

That is waiting too long given the nature of the risks is far more serious than any garden variety downturn. We’re toying with a balance sheet recession here. If allowed to run the pain will be epic.

As well, tax cuts are not going to work while wealth shrinks. The windfall will be saved. If fiscal is required, and it is, then it should be cash giveaways and investment. Aside from anything else, recycling a temporary commodity surge as permanent tax cuts is bloody stupid. Sadly, I suspect that is exactly what Recessionberg will give us, booby trapping the Budget for Labor, and delaying the much needed direct fiscal support.

Shifting to monetary policy, Chris Joye is his usual hawkish self:

If the RBA bequeathed the bubble, it was APRA who saved us by deflating it in an orderly fashion with an unprecedented series of constraints on new credit creation and a unilateral tightening of lending standards that compelled banks to hike rates on investment and interest-only loans by between 25 and 50 basis points.

Acknowledging these insights is important in the context of the feverish speculation that the RBA will get the yips from its long-held position that the next move in rates is up. There is a consensus that the RBA will once again debase the price of money as a result of declining house prices putting downward pressure on consumption and growth even though Australia’s jobless rate is at a historically low 5.0 per cent level that the RBA has stated is consistent with full employment.

A more sensible central bank might be concerned that its standard minimum move of two 25 basis point cuts would be capitalised right back into house prices, with Saunders and Tulip’s analysis implying home values will jump 14 per cent (more than negating the peak-to-trough losses recorded in the current correction).

Come on, mate. That was 325bps of cuts. It was before we had Chinese capital flight, rising funding costs (and yes, they are still rising in moving average terms), HEM reform, MP3.0, interest-only reset, no more negative gearing, oversupply etc, etc, etc. When we get our 100bps of cuts they’ll be half kept by banks for a total of 50bps mortgage easing and the impact on sentiment will be marginal. The main impact will be on the currency (as we’ve already seen).

Sally Auld at JPM finally bought some sense to the debate, also via Bloomie:

“At some point Lowe will sit there and say to himself: do I really want to be the guy, in six months’ time, where everyone points the finger at me and says, ‘you sat there and did nothing when blind Freddy could’ve told you that things are going south,”’ she said. “He doesn’t want to be that person”.

Why not? It’s a crowd!

David Llewellyn-Smith is chief strategist at the MB Fund and MB Super which is long international equities and local bonds that will benefit from a weakening Australian economy and dollar so he is definitely talking his book.

If the ideas above interest you then contact us below. 

David Llewellyn-Smith
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  1. GunnamattaMEMBER

    Our next government is building its credibility defences against claims of bullshido already.

    Proposing changes to minimum wage laws incorporates

    1 – maybe 3-6 months while they enact such laws (and presumably some time to consult with industry etc)

    2 – maybe a year on top of that for future government members to look cameras in the eye and declare ‘we have changed the laws to increase minimum wages and we are giving the changes time to take effect

    3- maybe another year on top of that for a wide ranging review (announced after year 1) to look at factors associated with Australian wages

    Which will all lead to a new minimum wage law in the lead up to the next election – which will enable its promotion as ‘tougher’.  All the while with the population Ponzi helping to moisten decisionmaker pockets.

    But down at the level of any given workplace the following will occur.

    A.      Australia’s exorbitant level of contractors and consultants and temporary employees will simply get more exorbitant, with more positions becoming contracts for service rather than contracts of service.

    B.      Australia’s ostentatious array of workarounds on full time employment would get worked around even more.

    C.      People get laid off/work not undertaken to start with


    The real issue – the one nobody, even the ALP, will talk about – is this………

    Here is Australia’s ten largest companies as of March last year according to Smartcompany  –

    1.    Wesfarmers ($69 billion)

    2.    Woolworths ($56 billion)

    3.    Commonwealth Bank of Australia ($45 billion)

    4.    BHP ($39 billion)

    5.    Westpac Banking Corporation ($38 billion)

    6.    Rio Tinto ($35 billion)

    7.    ANZ Banking Group ($34 billion)

    8.    NAB ($32 billion)

    9.    Telstra ($28 billion)

    10. NSW Health ($21 billion)

    Here is Australia’s ten largest private companies as of September last year.

    Visy Pulp, Paper and Converted Paper Product Manufacturing
    Hancock Prospecting Iron Ore Mining
    7-Eleven Food Retailing
    CBH Group Grain Storage
    Meriton Building Construction
    BGC Building Construction
    Hutchies Building Construction
    HCF Insurance and Superannuation Funds
    Teys Australia Food Product Manufacturing
    Cotton On Group Clothing Retailing

    Here is the ASX50

    AGL Energy Limited
    Amcor Limited
    AMP Limited
    ANZ Banking Group Limited
    APA Group FP Units Stapled Securities
    Aristocrat Leisure
    ASX Limited
    Aurizon Holdings Limited
    BHP Group Limited
    Brambles Limited
    Caltex Australia
    Cochlear Limited
    Coles Group
    Commonwealth Bank
    Computershare Limited
    CSL Limited
    Dexus FP Units Stapled Securities
    Fortescue Metals Group
    Goodman Group FP Ordinary/Units Stapled Securities
    GPT Group FP Ordinary/Units Stapled Securities
    Insurance Australia
    James Hardie Indust Chess Depositary Interests 1:1
    Lendlease Group FP Ordinary/Units Stapled Securities
    Macquarie Group Limited
    Medibank Private Limited
    Mirvac Group FP Ordinary/Units Stapled Securities
    National Aust. Bank
    Newcrest Mining
    Oil Search Limited 10 Toea
    Orica Limited
    Origin Energy
    Qantas Airways
    QBE Insurance Group
    Ramsay Health Care
    RIO Tinto Limited
    Santos Limited
    Scentre Group FP Ordinary/Units Stapled Securities
    Sonic Healthcare
    SOUTH32 Limited
    Stockland FP Ordinary/Units Stapled Securities
    Suncorp Group Limited
    SYD Airport FP Ordinary/Units Stapled Securities
    Telstra Corporation
    Transurban Group FP Ordinary/Units Stapled Securities
    Treasury Wine Estate
    Vicinity Centres FP Ordinary/Units Stapled Securities
    Wesfarmers Limited
    Westpac Banking Corp
    Woodside Petroleum
    Woolworths Group Limited

    The first thing that anybody notices about all of these lists is that unlike almost any other nation Corporate Australia has its head stuck firmly up Australia’s jaxi. 

    Of those companies only the following are not making the bulk of their revenues form Australians

    Four are RIO, BHP and Gina Hancock and Fortescue  – who are all in a competitive global marketplace, but whose position in that competitive global marketplace relies almost solely on the accessibility of Australian iron ore to the almost sole global client for Iron Ore – China – and the natural price advantage that requires less shipping costs from Australia to China and less cost to get iron ore mined in Australia to the coast to be shipped. 

    Newcrest, Woosdside, OilSearch, South 32 are similarly suppliers to offshore buyers of Australia’s natural bounty, and their success in their markets will be generally reflective of their access to the ore bodies or exploration zones in Australia.

    A few more, Amcor,  Visy and Teys Australia produce some things (Amcor and Visy in Australia and offshore, Teys producing meat in Australia) which compete sometimes in a global market. To the extent that they are selling Australian produced materials, using Australian labour, offshore, or onshore where they are competing directly with imports, they are genuinely competing with labour costs elsewhere.

    The last real competitive cabs off the rank are Cochlear & CSL who are increasingly rare examples of Australian design and technology who are actually (though both have production assets offshore) making something in Australia using Australians which is primarily sold offshore.

    The rest are all solely reliant on what they can gouge out of Australian consumers.  They have a direct pecuniary interest in Australians going deeper into debt, and buying their product or/and there being more Australians to buy their product.  Insofar as they are ‘competing’ to provide profits in any sort of competitive jungle, they are competing with other companies running essentially the same operating model they are – with the only real distinction between them being on proximity/geographic bases, or potentially a bit of branding and consumer awareness.    Their competitive position is underpinned by exhorting either more bums on more seats – hardly difficult in the age of the Population Ponzi – or by more debt – hardly difficult in the late neoliberal age with generationally low interest rates – rather than any amount of product innovation, systems refinements.  If they pay more for labour costs, they simply gouge the consumers a tad harder – and the real question about that dynamic from a national interest point of view is ‘Does raising labour costs for these companies benefit the national interest of Australia more, through more Australians spending more on things in Australia, than allowing lower labour costs to increase the profitability of those companies which flows back to Australia through the medium of the taxes those beneficiaries pay to Australia, in conjunction with the labour costs they are already sustaining?’  

    In order for Australia to maintain the quality of life for its people they have become accustomed to Australia needs companies to be competing for and successful in selling to offshore, or competing against foreign companies bringing things into Australia.  If Australia wants a payrise Australia needs to earn it, not have it legislated.

    But as HnH points out the woeful position of Australian capital – and how many times does one need to refer to a banking system which lends 60% for mortgages – of which a corporate sector so intensively focussed between its own cheeks is a classic example.

    Against this backdrop pressuring wages higher or lower is largely an exercise in managing the volume of flow around the gouging of consumers.  Australia’s labour cost dynamics in relation to Australias corporate positioning is not primarily about higher or lower wages meaning a more competitive firm which attracts more business because it is competitive, it is about higher or lower wage costs implying more or less corporate profit – and it ends there, because the same corporate reliant on gouging taxpayers dynamic means that the profits of the owners don’t relate all that much (particularly in an era of low interest rates) to the propensity of those owners to invest in more capacity. The only thing that really motivates any incentive to invest in Australia, it seems, is the risk a competitor may establish a geographic /locale or brand awareness advantage and the costs of meeting that risk, as balanced against the costs of being a second mover.

    What is required for higher wages – and I completely agree that in a deflationary world we are not going to get there any time soon, and that with the FTAs we have committed to we have effectively manacled our ankles behind our ears – is for a complete breakup and restructure of corporate Australia into smaller competing parts – while ensuring that foreign suppliers don’t flood the market with loss leading product which undercuts Australian produce (and given the current very high remunerations Australia has for many workplace activities that the rest of the world pays sweet FA for, it may not have to be loss leading for those producers/nations), and rewarding, in some way which fits our FA compliance requirements, those companies going offshore for consumers and markets.  That is not going to provide an uplift for wages either in the short term at least (and probably not for a long time even if it does).  In the short term it would translate to higher costs for Australian consumers.

    So that brings us, on behalf of our new government, to thinking what do we want higher wages for? We want them for improved quality of life, and greater ease in sustaining the debt we have already chalked up.  If we assume we aren’t going to get the higher wages can we get the better quality of life any other way?

    Can we cut taxes for the hoi poilloi? Currently those taxes paid by the hoi polloi make up a very disturbing part of the revenue base for the federal budget.  The only way we can tax them (us) less is to tax someone else more. Though todays Ninefax is positing a government taking a tax cut into the election – – , this is all about forcing the ALP to offer likewise, and from there to constrain the budget positioning in a year or so when the iron ore price has reverted to somewhere south of where it now is (presumably in the Australian tradition – with all revenue forecasts underpinning the budget blown out of the water).  If we think to ourselves that the real estate based stamp duty bonanza which is currently imploding state budgets will at some point materialise with consumers, employees and from there with the federal budget then presumably we will be motoring around this low wages, low interest rates, low capacity to fiscally stimulate using the budget for quite a while

    Australia, from here, needs to go right back to square one, and build an economic platform all over again.  It is similar to 1983.  Australia no longer has the worlds biggest industrial museum, it has a hologram of the museum pieces.  Australia no longer has Union issues, it has whole of society issues which our politicians (and the Unions) don’t touch – start with Immigration volumes.  Our political narrative, in comparison with 1982, is probably worse insofar as neither mainstream side of politics has ‘its’ electorate as firmly in its pocket as it didn back then, and our politicians are genuinely frightened of discussing key issues with their constituents, including

    ·         Immigration

    ·         The future being bequeathed to future generations of Australians

    ·         The financialisation of the secondary and tertiary education sectors

    ·         Foreign buyers of Australian houses

    ·         Part time, temporary and short term employment (and the increasingly meaningless nature of full time employment).

    ·         Why politicians are paid so much and have so much largesse lavished on them, by them on behalf of the Australian public, and their disturbing lack of accountability on this.

    ·         Why Australia has the worlds most impressive menagerie of uncompetitive natural monopolising, contract specious, gouging companies

    Ultimately we need to ask ourselves if our politics is actually capable of representing us anymore.  A look at the Poms and trump in the US would point to the Brits and Americans having arrived at that conclusion. Maybe it is really time for us to give expression to the great Australian political disenchantment.

    • But down at the level of any given workplace the following will occur.
      > A. Australia’s exorbitant level of contractors and consultants and temporary employees will simply get more exorbitant, with more positions becoming contracts for service rather than contracts of service.
      > B. Australia’s ostentatious array of workarounds on full time employment would get worked around even more.
      > C. People get laid off/work not undertaken to start with

      If there’s a recession, it’s time Labor took the same path they took in the 80s.
      Drop the definition of full time to say, 36 hours and let the market avoid the overtime the best way it can.

  2. Most of those commentators either don’t understand or forget the way things work over longer periods ie when credit is maxed out (which it is now given her changes in availability)

    “The belief that house prices will hold up so long as unemployment doesn’t rise too much also gets the causal mechanism arse-about-tit (to use a quintessential Australian expression). House prices will fall first, as they did in the USA, because “people” don’t buy houses: people with mortgages buy houses. This little detail is overlooked by property lobbyists who point to rigid supply as the cause of higher prices.

    The monetary demand for housing is overwhelmingly sourced from new mortgages. Divide the flow of new mortgages per year by the price level, and you have the physical flow of demand for houses per year. There is thus a relationship between the flow of new mortgages and the price level.

    It follows that there is a relationship between the change in new mortgages per year and the change in the price level. While the strength of this relationship varies between countries given variations in government policy and the impact of non-resident purchases of real estate, it applies in countries whose experience has been as disparate as the USA and Australia. Therefore, to maintain forever rising house prices, mortgage debt not merely has to rise, but has to continue rising at an increasing rate. This simply can’t happen: nothing accelerates forever, even private debt. At some point households reach saturation levels of debt compared to income. Before this happens, the rate of growth of debt reaches a peak and then starts to fall.

    Since the acceleration of (mortgage) debt determines house prices, and the rate of growth of (all private) debt determines credit-based demand in general and hence a major component of aggregate demand, the fall in asset prices tends to precede the decline in economic activity in a credit-driven recession. Therefore, rather than a rise in unemployment being needed to cause house prices to fall, deceleration in mortgage debt causes the rate of increase of house prices to slow and ultimately turn negative, and the overall decline in credit causes unemployment to rise.”

    • Jumping jack flash

      many people just can’t seem to realise that without the debt, many people simply wouldn’t be able to pay the ridiculous prices for houses.

      If prices rise, and there’s no debt to pay them, then activity stops, or prices fall. Probably both. It is really very simple.

      I can’t see how so many people attribute rising prices to all manner of things when in the majority of cases it was so clearly the debt that enabled those prices to be met. It is really very puzzling.

    • The sad thing is that the housing downturn is the best thing that has happened to the Aussie economy in years because it is cauterising our biggest financial stability risk. The RBA would be better served by tolerating a period of sub-par growth and allowing the housing market to clear.

      Amen, no more lower teh rates!

  3. it should be cash giveaways and investment

    Cash giveaways would be almost as irresponsible as tax cuts for the rich. It will gush out of the economy in the form of spending on imports – creating heaps of jobs in China.

    What we need is investment – activist industry policy, actually – that links growth to jobs and wages rather than to asset price bubbles.

    • GunnamattaMEMBER


      What we need is investment – activist industry policy, actually – that links growth to jobs and wages rather than to asset price bubbles.

      Should be seared into the foreheads of all past, present and putative members of parliament, all RBA boardmembers, be a 5 second addendum to all broadcast advertising, be a mandatory engraving on every driveway, be written above every doorway, be a sponsors logo on every national sports team, and be tattooed to the inner thigh of every political consultant or lobbyist with oxy acetylene equipment before they are allowed to practice, and be the subject of songs sung by schoolchildren.