February 2010

Andrew Pegler - 13 February 2010

Hello Valentine’s week lovers, it’s the cupid of economics here fearlessly firing weekly arrows of love (mixed in with the odd one of despair) into the digital ether. In this Valentine’s week I want to talk to you about your relationship. No not that one; it’s the one you’re rekindling with debt and spending that concerns me.

Retail sales are up, house prices continue skyward, personal debt is starting to grow and I hear margin lending is back on the card table. This sounds like a trial separation with frugality to me. Who gets the dog and how about the kids? In case you have been intoxicated by spurious data falsely indicating otherwise we just scraped through this meltdown mess by the hair of our chinny chin chin thanks to the low debt left by the Howard Government and bold, swift action by our Kev and Wayne. In other words, lovers, don’t stray back to your old ways of debt and spending. Put love over gold (Dire Straits’ best album?), temper rapacious spending impulses and learn to love to save because we’re not out of the woods yet. Chinese growth is slowing. Europe is teetering on the edge of a debt crisis. And the US employment picture still looks like a stick figure drawn by a five-year-old. Is that a light at the end of the tunnel or the entry light into another one? Simply start squirreling away a few acorns in case a cold snap turns into a winter of discontent.

To get this savings festival started right here’s a few tight-arse tips I prepared earlier:

1. Save on chewing gum by mixing blue tack with tooth paste.
2. Walk into your next party carrying a case of beer, struggling a bit like it’s full when in fact it’s only holding a six-pack.
3. Save on an expensive iPod by simply thinking of your favourite tune and humming it. To hear another song hum that one instead.
4. Save money on birthday cards this year by collecting up all the ones you get and returning them with the simple inscription “back at ya”.
5. And finally remember you can make clothing last twice as long if you only wear it every other day.

So that’s it, lover boys and girls, stay kind to each other and remember love is a good economy.

In other news… the monetary policy pendulum has just swung decisively toward further rate rises. January’s labour force figures reveal the strongest growth for three years with over 52,000 jobs created. The unemployment rate was 5.3% down from 5.5% in December. Meanwhile the US rate fell to 9.7% in January after the December high of 10%, giving hope that the hardest employment market over there in over 25 years is finally turning.

Andrew Pegler on February 09, 2010

Despite the “smart” money plunging, hurtling, even careering behind a rate hike all week the RBA board has gone against the script and in doing so has proved every economist surveyed wrong. Perhaps John Kenneth Galbraith was right when he said “the purpose of economic forecasting is to make astrology look respectable”.

Yes folks, as the shock of the no reverberated around the nation we all breathed a sigh of relief. Nearly all the pundits, however, except me (see my predictions for the year from a few blogs ago), who swore blind we were going to get at least a .25% hike, ran for the door. In fact a hike had been so well anticipated that bookmaker Centrebet refused to take any more bets on a rise declaring that “there was not a snow ball’s hope in hades of interest rates staying put”. It’s currently snowing in hell.

Basically our market economists got carried away by alluring data that showed strong growth in China, house prices going through the roof, inflation getting sticky, and unemployment declining sharply.

But the herd was feeding in the wrong paddock. It was chewing the wrong data cud because over the hill the clouds were still gathering in threats. For starters, information on the impact of the three rate rises remains limited. Plus banks putting up their home loan rates a full percentage point above the RBA cash rate put rates in the “normal range” allowing the RBA to build this into its strategy. On the global front the Chinese plans to wind back stimulus will impact negatively on our export earning. This has obvious implications for us. Plus, as I have written here before, there are grave concerns about what’s called sovereign debt, which basically means what each country owes after the global stimulus splurge. And there’s also the uncertainty of what will happen here as the stimulus starts to be wound back. Finally, inflation, the main driver of interest rates, is still not a big drama here.

But here’s a tip for the indebted - don’t get complacent because as long as the economy keeps on its current trajectory then these record low rates will have to move up. I will put myself out on a limb here and predict there will be two or three more rate rises this year totalling .50 to .75%. As for those economists, well don’t believe everything you read, err… except maybe the stuff that I write?

And in other news… according to credible independent number crunching out of the US, unless we see a Miracle on 54th Street the US will have virtually no room for new domestic initiatives. This raises the spectre of that very important country suffering the same problem Japan has had over the past decade or so. As debt grew more rapidly than income, Japanese influence around the world declined. The rise of China anyone?

Andrew Pegler - 22 January 2010

Please excuse me while I put on my horns, crank up the fires of Hades and assume the role of devil’s advocate for a double dip in 2010 - folks, the recovery is an illusion David Copperfield would be proud of and 2010 will be a shocker.

Right now things are going along well. Stats are looking up, the jobs market is turning, banks are starting to lend. But a closer look reveals what I call the Great Impression. All is not well and it’s hard to know where to start.

This year will be a very tough one for Australia and things that will be keeping Kev and Wayne awake include how to exit the fiscal stimulus, the creeping shadow of inflation, the bursting of the housing bubble, infrastructure bottlenecks and the small matter of moving to a low-carbon economy. Oh yeah, and this is all in an election year.

Then there’s history - you know that thing you are doomed to repeat if you don’t pay attention to it. After the Great Depression the economy was OK for the first two years then things got worse, a lot worse. And many see parallels between then and now. For starters this growth is illusionary - it’s stimulus driven but we’ve mistaken it for genuine economic activity. Yes folks, we’re about to learn that a bunch temporary shovel-ready Keynesian band-aids didn’t give us the fairytale ending we wanted. I would like to suggest we go back to the drawing board but unfortunately we sold it to the Chinese to pay for a Memorial Hall at Nowhere Primary!

Then there’s the recent spike in production and sales which is less about green shoots and more about the yellow weeds that have sprouted thanks to tax breaks and businesses tentatively stocking up after not doing anything for most of the year. The reality is that the demand needed to kickstart things just isn’t there and by year’s end we will have acres of warehouses full of dead stock.

Then there’s the international economy which is looking shakier than the trembling heart of a captured bird. (Thank you Roberta Flack circa 1971.) Everywhere you look there’s another country having trouble paying its debts - a phenomenon called a sovereign debt crisis. The massive debts taken on by countries to blow on stimulus packages will unravel this year turning the global financial crisis into the mother of all sovereign debt crises. Dubai nearly went under at the end of last year, Greece is teetering on the edge of oblivion and the UK is facing a possible credit-rating downgrade. And don’t ask Barnaby Joyce about the possibility of a US default - you’ll be there all day.

And finally, on a negative note, let me leave you with something out of The Economist this week: “This year the world may have to choose how to answer the question laid out in 2007 by the French president, Nicolas Sarkozy: an Iranian nuclear bomb, or the bombing of Iran?”

Until next week, keep fearing, stay anxious and be sure in the knowledge that the sky will fall in in 2010.

Why we won’t double dip in 2010

As we launch into another trip around the sun I thought it appropriate to explore both the doom or zoom scenario for 2010. This blog will present the reasons why we won’t have another recession in 2010 and next week I argue why we will. Meanwhile I’m off to see a movie with my split personality.

Towards the end of a recession conversation always turns to concerns of what’s called a ‘double dip’ i.e. a recession followed by a brief period of growth followed by another recession. But while it’s possible, it doesn’t usually happen, kinda like sleep for new parents. And there are a number of reasons specific to Australia for this. Firstly, unless we suddenly drift off into the Atlantic Ocean, we’re part of Asia. We have a Mandarin-speaking PM and, aside from the odd blue, China is a new mate. The UN predicts this new mate will have a GDP of 8.8% in 2010 and will need shiploads of raw materials to continue its nation building and coal to fire its generators. That’s our job and it’s good work if you can get it. In addition the UN is predicting an Asia-wide-led recovery for 2010 so that means even more demand for our goods and services from other neighbourhood besties like Japan, Indonesia, Malaysia and Singapore.

The few times that a double dip has occurred (early 80s and after the Great Depression) it was due to premature tightening. And no, that’s not a Jenny Craig weight-loss strategy. It refers to monetary policy. Specifically this means raising interest rates too early to curb inflation and/or prematurely withdrawing stimulus to cool things off a tad. However, this time around world leaders and the now-influential Group of 20 are adamant there will be no tightening until the recovery is definitely go. Phew!

As for fears of a share market crash - fuggedaboutit. With inflation and interest rates low and a planet of cash looking around for places to park itself the share market still has a ways to go. That said I do think it will slow down to grow only around 5.5%.

The other big thing to watch is the US economy because a double dip there would be a shocker for the rest of us. Despite the fact I have written about the unwinding of our interdependence with the US (remember the old adage if the US sneezes we got a cold?), it still represents a huge chunk of the international economy so it matters big time. The good news out of there is that inflation is low, house prices are bouncing back and banks are starting to lend gain. And while employment is stubbornly high remember employment always lags behind the rest of the economy in a recovery. As AMP’s Shane Oliver pointed out in his recent newsletter, unemployment peaked there two months after the end of the ‘82 recession, 15 months after the ‘90-91 recessions and 21 months after 2001 recession.

Well that’s it for my rosy take on the year ahead. Next week I will invite the clouds of doom to shut out those pesky shards of hope. Until then keep trickin’.

Andrew Pegler - 15 January 2010

To paraphrase Elton John in Son of Your Father circa 1970 bricks and mortar take blood and water. Indeed Elty is right. Buying a house takes a lot of work and while those galloping prices will slow a tad the trajectory for 2010 will, like Superman, continue to be up, up and away.

Our collective obsession with house ownership has sent prices through the roof and turned the great Australian dream of owning a home for many into just that. Over 2009 Melbourne house prices soared 17%, Darwin 15% and Hobart 14%, while Sydney’s median price ended the year on $655,000. This is despite successive interest rate rises in October and November and the winding back of first home buyer grants. Jeeze Louise!

The primary driver of all this madness is the lethal combination of an under-supply of housing and the fastest population growth in Australia in 40 years. In 2009 Australia grew by 440,000 people, but we only built 131,000 new houses. Basically, there aren’t enough houses to go around. In addition, the relaxation of foreign investment rules has seen more overseas bidders at auctions, thus stoking prices.

Following an entirely unexpected and exceptional 2009 for house prices, 2010 holds two scenarios, neither of which is good news for first home buyers. The first is that house prices will slow down to a more modest 5-10% as interest rates continue to move back to normal, inflation starts to creep back in and the emergency stimulus component of the first home buyers grant goes the way of the Dodo. In other words prices will rise but not by as much as last year.

The other scenario is bad news for everyone. A bursting of the housing bubble, the old boom-bust scenario. For most of us, buying a house is life’s biggest financial decision. It ought to be based on what you can afford taking into account rising interest rates, the possibility of you losing your job, and, of course, ongoing valuations. But Aussies have been gambling on houses for over 10 years now and if an event comes along that drove unemployment up or existing wages down then it could be cameras, lights, meltdown.

In other news… some commentators are tipping commercial property in the US is in such a bad way that it may send us all back into the abyss this year. With $1.4 trillion of commercial real estate debt set to mature over the next few years and over half of it worth less than the mortgage, it’s not hard to see why it’s being called a ticking time bomb.

As always I welcome your feedback and any ideas for subjects I can tackle. So go on, let us know what’s on your mind - log in and post your comments below.

Andrew Pegler - 15 January 2010