Break housing, break the Aussie economy

It is funny watching the ASX. Every day without fail, if miners go up banking stocks go down and vice-versa. It’s like there are no other sectors on the bourse.

And, let’s face it, there ain’t

If we’re talking global scale, Australia only has six stocks so far as the world is concerned. Four banks and two miners.

So, then, why do they always trade counter to one another?

It didn’t use to be this way. Bank and miners used to rally together as national income lifted, Australians spent and borrowed more and interest rates rose.

But that was before 2011. Afterwards, the mechanisms that once directed mining boom income into the Australian economy were broken.

Those mechanisms were threefold:

• budget surpluses and tax cuts;
• stock market gains, and
• investment booms leading to excess labour demand and big wage rises.

Of the three, it was the first and last that were by far the greatest. No longer!

These days, national tax policy has been destroyed by mining lobbyists. The budget revenues are not what they used to be and tax cuts were long ago replaced with hikes.

Worse, the China commodities that once drove national income are smaller. In real terms, iron ore and coking coal have come down a long way from the glory days and will continue to fall as China goes structurally ex-growth. The miners know this so they refuse to invest in new capacity, meaning no wage gains.

Finally, the steel commodities have been replaced by energy commodities like LNG. These attract far less tax and, on the east coast, actually cost the economy and budget money. They use bugger all wokers.

Moreover, the mass immigration economy GUARANTEES no wage growth acceleration thanks to a permanent labour supply shock.

This colossal and multifaceted policy failure is recognised by markets. They know that any lift in national income will lift the AUD but not households. So when miners rally they sell banks on a slowing economy.

Conversely, when mining sags and deflationary forces gather pace, they buy banks in the hope of lower interest rates and property price booms.

In short, the post-2011 paradox of Australia’s ruined economy is that it only grows when it shrinks!

From a macro policy perspective, this makes life very easy. If you want the Australian economy to grow, you boost mortgage demand. Either by making borrowing easier or pumping in more people. The latter comes with the bonus of hiding the recession in per capita numbers.

If you want it to slow very fast, you make mortgages more expensive or less available.

The RBA has already done so and the Aussie economy is stalling faster than any other DM. Six months ago we were two quarters behind the global cycle. Now we are ahead of it. Yesterday’s GDP had household consumption shrinking -0.2% in per capita terms despite record national resources income!

I don’t know when the hapless RBA will recognise it has broken the economy and the deflationary bust has begun but it won’t be long.

Cheer up, everybody. Unemployment is rising and the perma-recession boom is back!