News That's Fit To Punt - 05/Aug/2016

BOE Set Interest Rates At Lowest Rates Ever

We live in interesting times. If you see things that are once in a generation, then live long enough you might see it twice. There are people who presumably experienced the Great Depression firsthand, and are now experiencing the GFC audits aftermath. Yet, even they would never have witnessed the Bank of England settler interest rates this low.  That would be because it's the lowest 322 years.

The central bank's Monetary Policy Committee voted unanimously to lower its benchmark interest rate to 0.25 per cent, the lowest level in the bank's 322 years. The rate had been at 0.5 per cent since March 2009.

further this year, but he ruled out the possibility of negative interest rates. The committee's next meeting is set for November.

The bank also said that it would introduce a series of additional measures to support the economy, predicting that there would be little growth in the second half of this year and that economic growth would decline sharply next year compared with its earlier forecast for 2017.

What we're seeing, is the Bank of England moving to the point where it no longer has any means of adding stimulus to a moribund economy.  

The Bank of Japan has been doing this for over 20years. There's a whole generation of people in Japan who grew up under low interest rates and low inflation that they cannot imagine a world with 6%-8% interest rates and 5-9% inflation. You wouldn't be saying it too loud, but it appears the British economy has entered a similar twilight zone where no amount of interest rate cutting and stimulus spending can reflate the economy. 

It's a strange state of affairs, when you think about it. The central banks are virtually giving money away to banks so they can lend into capital investment. The place where most of the money ends up is in fixed assets, namely housing, and businesses just hoard cash instead. The consumer expects prices to drop in the future so they too hold on to cash; and together they form an environment where demand is low. The rest of the heartache and sorrow, about which you know, so I won't go into it today. I just thought it was worth noting that if you see an institution doing something it hasn't in 322years, you're seeing something very extraordinary; something they'll be talking about in a thousand years' time.

The question I want answered is how do we get to the other side of this malaise without wars and revolutions and killing each other? Because that's what usually happened in the past. 

About Those Jobs In America That Were Lost To Free Trade

I caught this during the week and it's an interesting little article because it shows we might be overstating the extent to which globalisation is eating up manufacturing jobs. If you go through to the Op Ed it is citing, you get this:

The number of manufacturing jobs in the United States has indeed been in a long decline since the late 1970s, but that disguises the true story of American manufacturing. Nostalgia for a bygone era blinds politicians and voters alike to the reality of a revitalized sector of the American economy that is thriving in a global market.

American factories and American workers are making a greater volume of stuff than ever — high-tech, high-value products that are competitive in markets around the world. In the last 20 years, which include enactment of the North American Free Trade Agreement and China’s entry into the World Trade Organization, real, inflation-adjusted U.S. manufacturing output has increased by almost 40%. Annual value added by U.S. factories has reached a record $2.4 trillion.

What has changed in recent decades is what our factories produce. Americans today make fewer shirts, shoes, toys and tables than we did 30 years ago. Instead, America’s 21stcentury manufacturing sector is dominated by petroleum refining, pharmaceuticals, plastics, fabricated metals, machinery, computers and other electronics, motor vehicles and other transportation equipment, and aircraft and aerospace equipment. 

We produce more manufacturing value with fewer employees than in years past because today’s workers are so much more productive. They are better educated, equipped with more sophisticated capital machinery and turn out more valuable products than their parents’ generation. And as a result they are better paid, with total manufacturing payrolls rising during the last decade even as the number of workers declined.

The article in a nutshell says it's technological progress that has eaten the jobs, not trade. I'd imagine that this is true in Australia as well. There are good trade deals and bad ones (like theTPP they keep trying to pass), but in most part the economy has had rational players when it comes to manufacturing goods. 

I've had a number of discussions with people about this very phenomenon. It has been argued by empirical economists in the past that technological development does not kill jobs, it more than creates more jobs. That when the car came about, the horse-drawn buggy makers went out of business but lots of people found employment making cars; and so when the Australian automotive industry closes, those people will inevitably find employment in areas of higher technology. It makes sense that this has happened, but it seems unlikely that re-training auto-manufacturing workers into high tech workers of unspecified industries is the same as retraining buggy makers into auto-manufacturing workers. 

Similarly, the past performance is no predictor of future performance, and so we cannot simply subscribe to the view that it will happen again because it happened before. The implication being derived out of the empirical numbers, seem to be technological progress is happening in such as way as to cut the rate at which future jobs are created. We're now on the incline where each new development will likely destroy more job than they create, which is a new phenomenon.

The Rudd Revenge Is Just Beginning

Here we go!

"What I don't respect is, having pursued this campaign for United Nations secretary-general for such a long period of time in abso­lute good faith, to then see that good faith dishonoured and trust broken,"Mr Rudd told The Australian.

Arguing he had no interest in pursuing a "quixotic venture", Mr Rudd claimed his continued campaign to be the next secretary-general was based on assurances and underlying assumptions of support from both the Prime Minister and Foreign Affairs Minister Julie Bishop.

For his part, Mr Turnbull has again insisted that he told his predecessor that it was a decision for cabinet and warned him in May that the chances of his nomination going ahead were not good.

Oh, I dunno what to say. This Parliament hasn't even sat yet and they've managed to make a problem out of a trifle.

Quick Shots - 05/May/2016

ZIRP Is Coming

I bet you've been thinking I've been crazy talking about Zero Interest Rate Policy as inevitable in Australia. Well, here's something for you to cogitate upon.

The idea that the official cash rate will eventually hit zero in this cycle is far from a consensus opinion in Australia. Economists are more likely to laugh than seriously entertain the idea. But last week's shock deflation data for the March quarter, which sparked an immediate reaction by the Reserve Bank on Tuesday, adds weight to the concept that Australia is simply coming in late to the inexorable downdraft of lower inflation and rates. 

"There is going to be a very long environment of low, near zero or negative rates, and clearly Australia is converging to that environment," Mr Gallo said from London. 

Source: Algebris 

He pointed to the "extreme overinvestment" in mining and energy sectors that would need to be unwound, weighing on growth. Over the past 25 years, Australia's exports to China had grown from 3 per cent of the total to about 30 per cent, Mr Gallo said, while in more recent years, the housing market had become increasingly dependent on foreign investors, particularly Chinese. 

"If you think about the last 20 to 30 years pre-crisis, Australia was a poster child of the credit boom and the China boom," he said.

There it is. And while that's not conclusive, it's nice to know other people can spot it coming.

There's A New Central Banker

After years of guiding the RBA through the GFC and post-GFC years, Glenn Stevens' term is up. He is being replaced by his deputy Dr. Philip Lowe.

Fifty-five year old Dr Lowe has worked at the bank since 1980 while still a student at the University of New South Wales. He has served as its head of economics, head financial stability, head of domestic markets and assistant governor responsible for the financial system. 

He also served as head of the financial institutions and infrastructure division at the Bank for International Settlements in Switzerland where he authored important research on role of central banks in low-inflation environments. 

Governor Stevens described the appointment as "superb".
"There could be no one better qualified than Phil Lowe to lead the bank through the next seven years," he said. 

"The bank will be in the best hands." 

"Dr Lowe brings a wealth of knowledge and experience to the role of governor, having served as the RBA deputy governor since early 2012, heading up many of the RBA's analytical departments, and publishing on a wide range of issues relevant to the operation of monetary policy over his three decade career with the RBA," Treasurer Scott Morrison said in a statement. 

Shadow treasurer Chris Bowen who worked with him while treasurer in the Gillard government described Dr Lowe as "one of the finest Australian economists of his generation".

I'm sure he'll be the one to take us to ZIRP and if necessary NIRP. 

More On Negative Gearing

Negative Gearing is a problem because it distorts the market. Just how much this happens is always debated with the argumentative finesse of people who regularly compare apples and oranges and some how discover theirs taste better. 

The Guardian had this article which is worth a read. 

In reality it is changes to capital gains tax in 1999 that really set the fire under the housing market by turning negative gearing from a niche activity to one which the treasurer would suggest is a favourite of nurses and teaches and police officers – the archetypal “mum and dad investors”. 

Prior to 1999 capital gains were taxed at a real rate – the nominal return less the inflation rate over the period you owned the investment. The Howard government then changed it to taxing the nominal rate, but only for half the amount. 

At the time there was actually debate over whether or not this would lead to people paying more tax.

Mark Latham – then on the opposition backbench – argued the change was “an open invitation for the tax minimisers, the tax avoiders and the capital speculators to do their worst in the Australian economy”. 

And whatever you might think about Latham’s more recent contributions to public debate, he sure as heck was on the money on this issue.

That's the thing about the old Howard Government and its mantra of small government was that is never saw a tax cut it didn't like. And so with a blind eye to how this would send the wrong incentive, they proceeded to rewrite the Capital Gains Tax.

When I reflect on it, it was around the turn of the century when one of my friends who was an IT boss started looking for an investment property. He'd been advised by his accountant that he was better off selling up his place in Glebe, buying a big house as an investment while renting a small flat. The logic wasn't obvious to me at all, but it was then explained to me that negative gearing would let this arrangement be very profitable. You could well imagine how this was going to lead to a rapid growth in people arranging their lives in a counter intuitive way so as to get this Negative Gearing to deliver profit.

But really the issue is of a tax policy that drastically changed people’s habits towards minimising tax and had the side effect of setting fire to the housing market and leading to a massive spike in the level of housing debt:

Over and above whether negative gearing or the capital gains tax benefit the wealthy (which they do) the issue is whether the tax policy has distorted Australia economy.

It clearly has and as a result at the very least, the discount to capital gains tax needs to be reduced.

And there you have it. It's going to be a big point of contention in the coming years. There are plenty of people who benefit from it and their lobby is strong. The whole finance, insurance and real estate industrial complex will fight tooth an nail to keep the gravy train running.

The truly sad thing about our government is that it's taken this long for the problem to even be a discussion point, well and truly after things have gotten well out of hand. It really doesn't bode well at all. 

May The Fourth Be With You 2016 Edition

Fighting Deflation In Japan

Here's something from Zero Hedge.

Interestingly, the BoJ’s attempts to achieve its price inflation target continue to end in failure with unwavering regularity. While the central bank’s astonishing ineptness in this respect is a blessing for Japan’s citizens (at least for the moment, their cost of living doesn’t increase further), it harbors the danger that even crazier monetary experiments will eventually be tried. 

While threatening additional easing measures at his press conference (such as driving negative deposit rates further into negative territory) Mr. Kuroda seems to have explicitly ruled out the adoption of “helicopter money” by the BoJ. This is quite funny, since it seems extremely unlikely that the BoJ will ever be able to extricate itself from its balance sheet expansion (which de facto amounts to an “unannounced” case of helicopter money provision)

Of course BOJ boss Haruhiko Kuroda ruled out 'helicopter money' provisions for the way to go about funding the government directly because it would be illegal. Thus it follows that they'll have to think up something else other than the Negative Interest Rates Policy to do in order to reach this 2% inflation goal. 

It's sort of interesting how the Bank of Japan went looking for this 2% inflation rate and did so by massively expanding the monetary base - which inlay man's terms is "printed lots of money" - and somehow still managed to have the Yen go up. From our old high school texts we learned that the Weimar Republic era Germany printed money to pay reparations and this resulted in astronomical inflation. It is therefore interesting that the emir scenario hasn't kicked in at all.

One of the reasons the expanded monetary base hasn't done the trick is because the printed money has gone to the banks who do not lend the money out as planned, and so the money sits there in the banks unspent. The banks for their part complain that there is nothing in which to invest. Thus the great printing press experiment remains stuck in the vaults of the banks. 

The problem is that the inflation would only go up if that money went around the economy chasing assets. To do that, they need consumers to spend, but consumers have all sort of reasons not to spend. Shinzo Abe for his part has been imploring the major corporations to raise their wages. Yet even pay has stayed largely stagnant. 

What this indicates is that the printed money went to the wrong place, pretty much as TARP and QE money went to the wrong places. As objectionable helicopter money is, the BOJ need to figure out how to shove that money into the pockets of the ordinary citizens so they feel they can spend that money. Otherwise all the prince money is going sit in the vaults of banks.

Reserve Bank Of Australia Cuts Rates

So much for the prognostication that the RBA might cut rates around June.
Instead, they were decisive.

Tuesday's historic interest rate reduction coincides with the federal government's third budget, which is expected to be mildly stimulatory despite pressure to narrow the deficit.
Deflation in the headline consumer price index, due mainly to falling oil prices and aggressive retailer discounting, was the first such quarterly contraction in seven years. 

Moderate inflation, the result of demand for goods and services – including labour – just outstripping supply, is usually the mark of a healthy economy. 

However, when prices and wages continue to fall, consumers often hold off on buying and companies on investing. Deflation also pushes up the relative burden of debt.
The cash rate is now easily at its lowest level under the current system of monetary policy setting. 

The latest cut puts Australia into the club of developed economies with ever-falling interest rates and bond yields. Japan, the European Union and parts of Scandinavia now have zero or even negative nominal rates. New Zealand, too, looks likely to keeping cutting from an already-low 2.25 per cent official cash rate.

Let's not kid ourselves. If the economy were actually running well, the RBA wouldn't be cutting interest rates. As the vagaries of politics go, it happened on the same day the Budget was brought down and really gave no scope for the Federal Government to argue it was managing the economy well.

If there's one dumb thing that the Howard Government entrenched in the public consciousness, it was the asinine idea that lower interest rates were a sign of better government. Now that interest rates are at historic lows and set to go even lower, it puts a big lie to the position that the Governments doing any good management of the economy. If this is good management of the economy, for goodness sakes give us the other stuff.

And So The Budget Happened

This year's budget would underline just how ineffective this government is.

Labor has questioned why the government is cutting corporate taxes while the budget is in deficit and only handing income tax relief to Australians on over $80,000 a year even though 75 per cent of Australians earn under that amount. 

In his first interview since Tuesday night's speech by Treasurer Scott Morrison, Mr Turnbull said he believed his first budget - which delivered tax cuts for small and medium businesses, new measures to encourage young people into jobs and cutbacks to superannuation concessions for wealthy Australians - was an "exciting" one.

"A lot of newspapers are saying, 'this is a bit of a dull budget'," Sunrise host David Koch told Mr Turnbull. 

"We all thought you would bring the big excitement and changes."
Mr Turnbull responded: "Scott Morrison was delivering a plan for jobs and growth - I think that's exciting but everyone has their on views on that. 

"The BCA [Business Council of Australia] described the changes to business tax, the biggest changes to business tax in more than a decade. 

"These are substantial tax reforms but these are reforms that are designed not for the short term, not for an election. 

"They are designed for the long-term, to ensure that we continue to get that successful, economic transition from an economy that was fired up by a mining construction boom to one that enables us to live within our means, have a sustainable tax system but above all, drive that economic growth and jobs upon which our futures and those of our children and grandchildren depend." 

Despite the RBA's shock decision to cut the cash rate to a record low of 1.75 per cent on Tuesday, Mr Turnbull said the economy remains fundamentally strong.

I like the insistence that it is an exciting time and that the economy remains fundamentally strong when on the same day the RBA goes and cuts interest rates to historic lows. For reasons and factors totally out of their control, the Australian economy is heading into the ZIRP twilight in the next few years without a plan to get out. It's not even as if Australia has a really matured manufacturing sector or the population growth is stagnating (thanks to immigration it's not) so it can be sheeted home to the massive amounts of money tied up in the Property Bubble together with the world's largest private sector debt per capita. If you want us to get excited about that, you've got another thing coming Mr. Turnbull. 

None of those problems are solved. Negative Gearing stayed in place, which was something expected, but you have to wonder about the wisdom of tightening the Superannuation loopholes fr the rich while keeping Negative Gearing going because some people think the money is going to flood into the property market, furthering the Bubble. It strikes one that the Federal Government - regardless of which party is in power - refuses to acknowledge the elephant in the room and keeps trying to talk around it as if there's room to manoeuvre. 

A crackdown on superannuation tax concessions for the rich, coupled with a budget day cut to interest rates, could increase the flow of funds into negatively geared investment property.

Ahead of the 2016-2017 federal budget announcement, two of the country's leading actuaries, Rice Warner chief executive Michael Rice and Mercer senior actuarial partner David Knox, warned that any crackdown on super tax concessions for the rich without any changes to the negative gearing rules could have the unintended consequence of pushing more money into property. 

That is exactly the policy combination that we got on Tuesday night. And to add fuel to the fire, earlier in the day, the Reserve Bank of Australia dropped the benchmark interest rate by 0.25 per cent to a record low 1.75 per cent.

In other words, this Government just fed the elephant in the room while not acknowledging it's there. 

All that being said, it's not as if it's making outlandish forecast projections for growth like WTE Joe Hockey's last budget. There's some difference between a plain old crappy crap sandwich and a double poo sundae. 

Deflation Shock?

What They Mean By Deflation

Where do we start with the news that we saw deflation in Australia in the last quarter? We haven't seen deflation since 2009 when markets were at their nadir after the GFC broke.

The surprise drop in the price of a wider-than-usual range of items drove the Australian dollar down more than 1.5 per cent and could force the Reserve Bank of Australia to cut the cash rate as soon as next Tuesday, say economists. 

The Australian Bureau of Statistics said on Wednesday the consumer price index (CPI) contracted 0.2 per cent in the three months to the end of March, taking the annual rate to 1.3 per cent, compared with 1.7 per cent at the end of December. 

More importantly, the core annual rate, after lopping off or re-weighting volatile items such as fuel, came in at 1.55 per cent, well below the bottom of the Reserve Bank of Australia's target band of 2 per cent to 3 per cent. National Australia Bank described the core inflation rate as "the lowest ever".

And so we are led to believe that interest rates will be cut soon. 

I know it's contrarian of me to say this, but the inflation rate has been under-reported since the ABS changed the way it measures inflation rate. Given that it is prone to (or rather, intended to) under-report the inflation, it's not surprising that a few commodities dropping below trend would give rise to such figures. In particular it's notable that health, insurance and education still went up. In an overall sense, things are not getting cheaper  in the cost-of-living stakes as the deflationary figures would have you believe. It's not even certain that the deflation would persist into the next quarter. 

Still, the cheated inflation rate has led to a very big tendency towards looser monetary policy which has fed the Property Bubble through low interest rates. In a way it is a self-defeating feedback cycle where, as inflation is cheated downwards it creates conditions for lower interest rates, which in turn create conditions that results in a Property Bubble forming because there is nowhere else for the money to go. As more and more money is tied up in Property and Financial instruments, the less money is spent in the economy so there is even more pressure downwards on inflation figures but not necessarily inflation itself. We know there must be heavy duty inflation going on somewhere because the very definition of inflation is too much money chasing too few assets, and Australia for all its riches isn't that rich in assets beyond housing and mining and banking.

What should be galling to the Government if not the RBA is how all the money that's flowed into the market through low interest rates is finding a way not into industrial capital investment but into housing and property. Given the lowered interest rates there should be a lot of money going around but somehow it all finds its way to the big four banks who then don't invest in anything because, well, there's nothing of note into which to invest. While the mining boom was going on, there were any number of things in which to invest, but the post Mining Boom economy has shown just how hollowed out Australia's economy has become. 

Let's face it, the most glaring problem might be that even at 2% official interest rates, there is only anaemic economic growth in a country that cannot be described as mature industrial. It's not like wages are rising rapidly. It's not like the government has a plan beyond being excited and wanting to be agile. It sounds as hollow as the economy when the same government spent enormous political capital crippling the NBN. Should our country be in the sort of economic-figure-doldrums like Japan, Germany or France? 

From TwIRP Towards ZIRP

Of course, the markets are factoring in a couple of rate cuts this year. If they do cut 0.25% in May and the another 0.25% by the end of the year, we'll be a lot closer to ZIRP than ever before. 

I don't know if the Property Bubble is starting to affect people's spending, not so much through debt being a problem, but more in line with the fact that lots of Millennials are staying at home. They probably won't be buying whitewoods for a start but they are also restricted as to just how much stuff they can buy if they're still dwelling in their parents' house. There's a lot of demand right there that's essentially blocked by the very physicality of the economy. Even if people had money to spend, they can't buy things because they have nowhere to put them. They can't spend on services because in most part they are met easily by living at home. The only things they do buy are gadgets like smart phones. 

Indeed, one of the interesting things about the Property Bubble in Australia is that has been going on for so long that it hasn't needed to pop to significantly hinder economic growth. The low interest rates that continue to fuel extraordinary valuations has led to record profits for banks, and that's no accident. The post-GFC economy might be hard on primary and secondary industries but the financial sector has been doing really well on the back of all the easing.

And lets face it, the Central Banks of the world are most likely swayed by the opinions of bankers so it comes as no surprise that banks have made out like bandits under these loose monetary policies. Pretty soon all the bankers are going to be telling the Reserve Bank how 'deflation' is killing asset prices and make it like there's a major crisis going on out there in the various markets. If the deflation goes two or three quarters, it will be a clamouring of bankers knocking on Glenn Stevens' door. You have to wonder then how long the RBA is going to take before it gets down to Zero Interest Rate Policy. When we get there, we'll understand the wealthy have locked in their advantage, and that Australia is officially 'post-industrial' like Japan and European countries with low interest rates, low inflation, and low growth. The joke would be that we were hardly industrial before we got there - we put the money into housing and the road came to an end.

John Howard Did Us No Favours

I guess you have to go back in time a bit to the Howard Government to see where the number-fiddling started. Unemployment in the second half of the 80s and first half of the 90s was a big thing. The figures were such that it was part of John Howard's pitch that he would bring these figures down together with the high interest rates. It was under the Howard Government that welfare was cut and privatised, while pushing people off unemployment benefits and on to things like disability pensions. It was an attempt to recategorised the people who couldn't easily find employment so that they wouldn't all show up as unemployed. They no longer showed up as unemployed so it looked like the Government was finding people jobs.

Similarly the under-reporting of inflation started during the Howard Government. When governments talk about inflation rates of the 80s and 90s as if those figures can be compared directly, they're being mightily disingenuous. Back then the inflation rate and cost-of-living figures were in line and almost interchangeable. Today, there is a huge blow out in the difference between the inflation rate and cost-of-living, so much so nobody's even talking about it any more.

So if part of the Howard Government's big achievements were lowering unemployment figures and interest rates then it did so by cheating on the numbers. By cheating so hard it set up this decade for the inherent contradiction of its claims to surface. The economic growth figures are so low because the Howard Government didn't make proper investments in its time - it chose to fiddle numbers and created the conditions for the Property Bubble to manifest instead. Now it's time for the subsequent Coalition government to clean up the mess but it's flying blind because the numbers are phoney. All thanks to the Howard Government.

But hey, we kept our AAA ratings!

View From The Couch - 16/Dec/2015

ScoMo Is A Different Kind Of Economic Animal

The MYEFO has come out and well, Scott Morrison isn't exactly cutting everything in sight. Yes, he's cutting some things, but he's vowing not to chase the fall in revenue down. 

Scott Morrison has learnt well from Joe Hockey, Chris Bowen and Wayne Swan.

The best thing to do when revenue is collapsing is to let it, lest it bring the economy down with it. 

As he put it: extreme measures would have placed "a hand brake on household consumption and business investment growth" and unnecessarily threatened emerging signs of economic momentum.

That's pretty contrary to the Coalition diatribe about debt only months ago, and as enacted in two disastrous budgets under WTE Joe Hockey. It must be that at heart, we're all Keynesians now, as the saying goes. 

It also shows that the Turnbull Government really is a different beast to the Abbott Government, at least on an operational level. A simple question of "what would Tony have done?" yields images of a cigar-chomping, axe-wielding WTE Joe. Instead, he's telling us it's not going to be austerity all the way down. I don't want to praise Scott Morrison in the least freaking bit but you have to hand it to him, he's not reacting as one would have imagined from his turn as minister for turning back boats. 

I have to admit, I'm a little surprised. On another level, I think I can see we're heading towards ZIRP a lot more than raising interest rates. As it turns out, it's really hard to get the market off the easing bias. Who'd a thunk it? 

Which leads me to the next thing... 

When The US Fed Dons Wolf's Clothing

This is weird when you reflect back to the utter chaos of the GFC at its height in August 2008. The US Fed is about to raise interest rates by 25bps sometime this week or early next year. Indeed, the speculation is that they have to do it this month because there are no more months beyond December and they committed to doing it before the year was out. So, logically, it's this month. The countervailing view is that the situation is so dire and the High Yield bond market is collapsing so fast, the Federal Reserve Bank would have to be crazy to pull the trigger. 

The fact of the matter is, they didn't pull the trigger when it was benign back in October, so we were left asking the question, if not then, when? If things get precarious enough, the FRB is going to have to think about easing again in no time, which means they'll back at ZIRP in a matter months. It is as if Wall Street is permanently addicted to having cheap indefinite credit and anything else makes it fatal to the whole financial system of the planet. In other words, nothing structural has been fixed since the GFC, that caused the GFC. The risk factors are right back up to where they were on the eve of the meltdown. 

And still, the language from Janet Yellen has been that they're going to raise rates because things are going so much better now. Goodness, it's hard to think all the way back to Paul Volcker in the 1980s. Would he have hesitated? No not a chance. 

On a more local note, the anticipation of the move has created ructions in our own equity market in Australia. It's very strange:

"Amazingly enough it hasn't been priced in. It really is quite extraordinary," he said. "Perversely we may see markets rallying on the back of it once we have some certainty about what the central bank is doing in the US." 

"It's all around these issues regarding sustainable, stable commodity prices and whether we get a decision out of the US Federal Reserve," said Mr Lakos.
Chris Conway, head of research at the Australian Stock Report said while some traders were dipping back into beaten down stocks, the overarching vibe was one of caution. 

"We don't expect any large moves ahead of the US Fed decision on Thursday morning (Australian time), with no-one ... willing to take on too much risk or place any big bets despite the outcome being largely expected," he said. 

"We also expect some volatility immediately after the decision but hopefully, once everyone has processed the result, markets calm and we rally into the end of the year."

So shares got oversold in the last 48hours because everybody suddenly remembered that Janet Yellen was possibly/probably going to go for it with the interest rate hike. Which means that if and when it gets announced, shares are likely to bounce back from 2.5year lows. Like I said, this is really weird. 

China Crisis On The Brew

Nobody's really talking about it in the mainstream news but, China's economy's actually on the ropes. How do we know this? Pretty simple. When China was going great guns, commodity prices were up. For commodity prices to hit the skids this low, this hard and for this long, means China's really run out of puff and can't turn the commodities into economic growth. The collapse in demand for iron ore and coking coal is more than telling, it's both a white flag from China and a red flag for the Australian economy.

In that spirit, here's a story that you might find explains a lot of things.

Several local officials in China's Northeast region sought to explain dramatic economic drops in their areas by admitting they had faked economic data in the past few years to show highgrowth when the real numbers were much lower, Xinhua News Agency reported on Friday. 

"If the past data had not been inflated, the current growth figures would not show such a precipitous fall," one official was quoted as saying. 

The report cited several officials in the region who acknowledged they had significantly overstated data ranging from fiscal revenue and household income to GDP. 

Three years ago Liaoning province's GDP growth was reported at 9.5 percent, but its current figure－over the first three quarters of this year－is just 2.7 percent. Jilin's growth was reported at 12 percent three years ago, but its current rate is 6.3 percent in the same period.

That right there is your confirmation. The Chinese figures have been worse than rubbery, they've been fraudulent. Not only is the commodity boom over, we're in uncharted waters as to exactly what the hell is going to happen next in China when all the debt racked up to fake the demand to fake the growth comes home to roost. So if you're inclined to believe this week's offical statement about strong industrial production and retail sales in China... sure why not? Let's all take that blue pill from Morpheus' hand. 

View From The Couch - 06/Oct/2015

TwIRP Towards ZIRP

This is disconcerting to the people who watch numbers all day. Financial markets are pricing in a 65% chance of further interest rate cuts, taking us down to record lows of 1.5%. When it hits that number, I guess we won't be calling it TwIRP any more, it'll be some other beast headed towards Zero Interest Rate Policy, even in an allegedly healthy Australian economy.

"If they wait until February, it will be too late and they'd need to cut again immediately after the first one. So we're hoping, and expect them to go in November," economist Josh Williamson said, citing the labour market figures as the trigger. 

Meanwhile, Bank of America Merrill Lynch has looked at the timing of the first rate rise by the Reserve Bank, generally not expected before late 2016. 

Analysts say even that may be too early as the local central bank is viewed as facing similar challenges to the US Federal Reserve on its path to lift-off. 

"The US Federal Reserve has been extraordinarily transparent in its intention to lift interest rates at some point this year. It has also been extraordinarily cautious," chief economist Alex Joiner wrote in a note, which, in a subhead, pointedly and somewhat provocatively asked: "Will the RBA ever be able to raise rates?"

He said that "this all comes as US economic growth, although absent an inflationary pulse, appears quite solid".

Well, where do we start? We all know about the inflation figures being wildly inaccurate thanks to the development over the years of ways in which not to calculate inflation, just so that central banks look good. 

Every time a central bank cuts rates, it gooses the equities market, and everything looks good. There's an imperative to goose the share markets because that's where our superannuation is tied up one way or another, and with low interest rates, there are a lot of people who are forced to take the risk of being in the share markets so they can collect the dividends and live on that, instead of the appallingly low interest rates. 

But of course lowering interest rates adds fuel to the hot air balloon that is the property bubble in this country; and let's not forget all our banks are plugged into this bubble at the fundamental level of mortgages. They dice up the mortgages into mortgage bonds and on-sell it, but in most part, if the bubble blows up, the banks are going to take a hit. When the banks take a hit, their shares are going to go down, and with them dividends. There are going to be a lot of retirees who are going to have their cashflow blown out of the water, even if they're not real estate investors. 

How likely is it that the bubble will burst? I don't know. I've asked people from Japan how long the Bubble took to build in Japan but I only get a vague time frame of 5years, maybe 10years. They're vague because the original slope upwards was very gentle and you couldn't say for sure where the definite start point sat. This would be true of Australia, where until early this year most authoritative pundits were telling us there was no property bubble, and that things were priced fairly. 

Maybe the picture is changing. Paul Sheehan of all people is now going on about what happens when the Australian property bubble pops. It's a bit of a joke because his real target is Bill Shorten and the ALP and what terrible policies they would have should they be in power when the bubble bursts. It doesn't seem to occur to him that if it bursts in the next 12months while Malcolm Turnbull is the Prime Minister, the Liberals collectively don't have a better idea as to how to rescue the economy. 

It's really unlikely there's a plan for when the bubble bursts because there's simply too much money in the real estate market to bail out with public monies. Banks will be shored up, but beyond that, there won't really be a way of shoring up housing prices. If you can even imagine that scenario, do you think it's in the Liberal Party's thinking to manipulate markets to save asset prices? Remember, these were the munchkins going on about government debt during the GFC when liquidity dried up and could have felled our major banks. Besides which, proper liberal thinking would say market corrections are part of the market so let the prices fall where they may. 

Which brings us back to the RBA which is charged with setting interest rates to aim for certain outcomes and has sat on the sidelines when it comes to housing prices and property bubbles and any such talk. They're already in a vice grip because they want the Australian dollar to go down; but interest rates are already at historic lows. If people aren't borrowing money to invest in businesses and making capital investments but instead are locking it up in housing, then lowering interest rates isn't doing the trick. If they really do go to 1.5% by the end of the year, then that's an indication that our economy is in dire, dire straits.

When The Bubble Pops

You can cue 'When the Levy Breaks' if you like. Or 'Here Comes The Flood'. I was talking to some people who lived through the rapid devaluation of property in Japan when the bubble popped. They had bought investment properties at about the equivalent of $300k. Then, it started to climb steadily until 3 bedroom flats in suburban Tokyo and Osaka hit the equivalent of $1million, but they didn't sell. They thought that was priced fairly - and they based their judgement on the fact that if the rest of the market was asking for the equivalent money and getting it, then it must be worth it (sound familiar?). When the Bubble popped, prices slid down to the equivalent of $400k in a matter of months, the banks went into receivership by the dozens, and so the government stepped in to shore up the banks and made them merge. 

The bank mergers were a messy affair. Lots of people in banking lost their jobs in the big squeeze, cutbacks, redundancies, and shuffling and culling of offices. It was a disaster for people who picked banking as a career and were in their 20s. They were cast out the door first with nowhere to go. There's a whole generation of mostly Gen-Xers in Japan that copped this turmoil straight in the face, and naturally those people didn't go off and have kids because their financial security had evaporated. This contributed to the slowing population growth, the effects of which we're seeing now. 

All the while asset prices were pulverised. Bad debts multiplied. You couldn't keep track of the spiral as just about anybody and everybody with a mortgage found themselves underwater. Banks simply couldn't write off the bad debts because all this capital had been destroyed simultaneously- writing it all off would have meant instant closures of all these baks, with deposits and all. 

The government went on a spending spree, trying to stimulate growth for a decade. It spent big and it went into great debt to do this spending - but of course most of the infrastructure investment went to vested interests with lobby groups and resulted in a plethora of unnecessary capital works, (think, WestConnex all over the country) which in turn turned out to offer no increase in productivity, but merely put the government further in debt. The central bank put interest rates at close to zero. This destroyed the retirement plans lots of people - and with the growing number of elderly people thanks to an ageing population, shaved the living standards of the middle class right down. 

In short, it's been cripplingly bad ever since; but at each juncture, what all the players did was go by the options given and choosing the least worst option out of many bad ones. That's how it goes. So when you look at Australia where inner city dwellings have hit well over $1million, you have to think it could easily all go to shit. If Paul Sheehan thinks he's going hang it all on Bill Shorten and the ALP, he is an imbecile (but we knew that anyway). If the day comes when the bubble bursts in Australia, it's going to eat up much more than a couple of careers in politics. 

The Price of Doing Business

Here's something interesting that must be the sign of the times:

Cr Byrne, who will seek the backing of his fellow Leichhardt councillors on Tuesday night, also hopes to win the support of other Sydney councils that have similarly seen their commercial centres hurt by a mix of factors including high rents, competition from mega malls, and the rise of internet shopping. 

The mayor's proposed "carrot and stick" approach would pair incentives such as speedy approvals for short-term leases with amendments to state and federal tax laws that would discourage premises being left vacant indefinitely. 

"Under the Local Government Act, there is currently no allowance to reduce rates for those property owners who keep their properties tenanted or to increase rates for landlords who are using their properties as a tax write-off," Cr Byrne said.
"It's time for that to change." 

However, Angela Vithoulkas, a City of Sydney councillor and small business owner, cautioned that the causes of declining main streets were "much more broad" than the role played by property owners. 

"I've spoken to landlords who have vacancies on Oxford Street, they're as equally alarmed about the problem, not being able to find a tenant," Cr Vithoulkas.
"Do they just put in pop-ups, peanut rents? How do they fund that because that devalues their property as well once there's a rent value attached." 

Cr Vithoulkas said incentives were the answer rather than "the stick", adding that changes could be introduced through the Retail Leases Act, which is already under review. 

"Maybe you could have a discount on your land tax if you were encouraged to put in a tenant at a discounted rate," she said.

Good god, it's hilarious reading that. Nobody wants to take a haircut on their investment, right? One councillor thinks if they fined the property owners, that would encourage them to lower rents and get tenants in. In other words, there should be an enforced haircut to the property owner because it's a bad look for the council to have empty shops. 

The other councillor says, no, no, no it's hard getting tenants. Not many people can afford the rents, but if hey lowered rents, it effectively is a haircut. So no. But if the council took the haircut on behalf of the property owners, then that might be okay. 

There's nothing so awful as the aggressive pursuit of self interest at the expense of the public purse, but be that as it may, it shows that retail in Australia is squeezed not only by the competition from on-line but from the property bubble itself, demanding high rents. On the one hand, the consumer has many means to price the wares on offer more accurately which eats into the margins; but the landlord also wants a bigger chunk of the margin. What's a retail business renting a shopfront to do? Maybe the numbers have reached the point where there just can't be retail businesses in certain areas, thanks to the property bubble?

At a certain point the landlord has to recognise what the market will bear is much lower than they are insisting. The haircut is theirs to take, and they can't be passing it on to the council. If the council gave into that demand, it's giving way to a moral hazard. If you go out there and invest in a shop, it's part of your risk that you might not get the rent you want. The tenants are already shouldering the risk of having to meet rent and trying to squeeze out a margin - they're the ones that need the help, not the property owners. 

Over the last few months I've noticed some old musical instrument shops go out of business. It's not long ago that Jackson's Guitars went into receivership but Smithy's seems to be gone, and the Classical Guitar Shop has also gone from Parramatta Road. It's not exactly surprising given just how much money has headed on-line and away from traditional retail outlets. I think Dickson's Music in Chatswood has also closed its doors. That's a sad one for me because once upon a time I worked there when I was a youngster. 

I guess it is ironic that after the musicians were mauled out of business by the digital economy, it was then the retailers of musical instruments that got mauled out of the economy by both the digital economy and the property bubble. I wonder who will have their meal tickets taken away by the digital economy next. It would be kind of funny if it happened to bankers, lawyers and doctors. 

News That's Fit To Punt - 08/Jul/2015

The Optimists' Corner

The really funny thing is that when things are going wildly in a bad direction, somebody will come up with a contrary opinion in wildly the opposite direction. It's hard to fathom it, but on a day where the Shanghai index had to suspend trade on 40% of their blue chip firms to stop people trying to squeeze out the door at the same time, Goldman Sachs said that it sees no bubble in the Chinese equity markets.

Goldman Sachs is sticking with its optimistic forecast in the face of record foreign outflows, the biggest-ever selloff by Chinese margin traders and a chorus of bubble warnings from international peers. The call hinges on the success of unprecedented government efforts to revive confidence among individual investors who watched equity values tumble by 3.2 trillion over the past three weeks. 

"It's not in a bubble yet," Lau said in an interview. "China's government has a lot of tools to support the market." 

Lau, who set his CSI 300 target on July 1, confirmed on Tuesday that the projection still stands. He's been forecasting gains in Chinese shares for much of the past year, a stance that paid off as the CSI 300 surged to a seven-year high last month.

Heck, they may be right. Maybe there will be an almighty bounce soon, what with China's government pumping in liquidity, but... there's just this chart here:

...which sort of paints a picture of how these kinds of things don't work out too well. 

Just to be sure, I sort of poked Roger in HK who - as his living - gives investment advice to the stupendously rich in Asia. To which he replied:

The Chinese can't go to the Macau casinos because of govt crackdown on corruption, so the money's gotta go somewhere. It's like one big wet market where you can get leverage financing. Buy10 bananas for the price of one now and pay later? Yeah give me a hundred!

After lunch, he sent back two phrases. The first, as the market opened was, "Meltdown". A few hours later he told me "It's a Bloodbath." I told him to tell his clients to BTFD ("Buy The Fucken Dips"). I only got a smiley-emoticon back. I'm sure Roger's laughing-out-loudly, because that's his natural nervous reaction to anything out of the ordinary.  

The other wildly optimistic article was this one that said there is no housing bubble, Australian property prices were 30% undervalued. 

What has changed since then is that real long-term interest rates have fallen substantially. That fall made housing more attractive relative to renting, despite the increase in prices." 

Dr Tulip and his co-researcher compared the cost of renting and buying identical properties, avoiding the common trap of comparing national average rents with national average prices. Because owned homes are typically "bigger and nicer" than rented homes, a lot of the apparent price difference reflects a quality difference. 

They calculated the annual cost of a bought home from the purchase price, the transaction cost, the expected mortgage rate and the running and depreciation costs offset by expected capital gains. 

The annual cost of owning a home bought in April was likely to be 2.7 per cent of its value. The annual cost of renting the same home was likely to be 3.9 per cent. 

"So you can either pay 2.7 per cent of the value of the property to buy, or you can pay 3.9 per cent of the value to rent," Dr Tulip told the conference.
"The undervaluation is 30 per cent. 

"It's unusually wide, the widest in at least 30 years. I can take you back further but the data quality deteriorates the further we go back.

Ri-i-i-ight. I can follow the maths where 3.9% is 30% over 2.7%. But this is based on TwIRP. I wonder what it would look like under ZIRP - probably even better. Mathematically speaking, the gap would open up even wider as interest rates asymptotically reached towards Zero. While mathematically being true, you sort of wonder whether the real world economics would reflect such calculations. When we get down to ZIRP, we may no longer have banks that are willing to lend to people wanting to buy multimillion dollar homes as their first homes, given that the economy is at a zero-sum game. 

Anyway, I just thought you'd be amused by those two wildly optimistic views of what we are looking at: a market crash in China and a property bubble in Australia.

The 'Greferendum', Revisited

Walk-off HBP thinks this one's a bit alarmist, but it contains some really interesting information that is a little disturbing. 

Greek premier Alexis Tsipras never expected to win Sunday's referendum on EMU bail-out terms, let alone to preside over a blazing national revolt against foreign control.

He called the snap vote with the expectation - and intention - of losing it. The plan was to put up a good fight, accept honourable defeat, and hand over the keys of the Maximos Mansion, leaving it to others to implement the June 25 "ultimatum" and suffer the opprobrium.

This ultimatum came as a shock to the Greek cabinet. They thought they were on the cusp of a deal, bad though it was. Mr Tsipras had already made the decision to acquiesce to austerity demands, recognizing that Syriza had failed to bring about a debtors' cartel of southern EMU states and had seriously misjudged the mood across the eurozone.

Instead they were confronted with a text from the creditors that upped the ante, demanding a rise in VAT on tourist hotels from 7pc (de facto) to 23pc at a single stroke.

Creditors insisted on further pension cuts of 1pc of GDP by next year and a phase out of welfare assistance (EKAS) for poorer pensioners, even though pensions have already been cut by 44pc.

They insisted on fiscal tightening equal to 2pc of GDP in an economy reeling from six years of depression and devastating hysteresis. They offered no debt relief. The Europeans intervened behind the scenes to suppress a report by the International Monetary Fund validating Greece's claim that its debt is "unsustainable". The IMF concluded that the country not only needs a 30pc haircut to restore viability, but also €52bn of fresh money to claw its way out of crisis.
They rejected Greek plans to work with the OECD on market reforms, and with the International Labour Organisation on collective bargaining laws. They stuck rigidly to their script, refusing to recognise in any way that their own Dickensian prescriptions have been discredited by economists from across the world.

"They just didn't want us to sign. They had already decided to push us out," said the now-departed finance minister Yanis Varoufakis.

So Syriza called the referendum. To their consternation, they won, igniting the great Greek revolt of 2015, the moment when the people finally issued a primal scream, daubed their war paint, and formed the hoplite phalanx.

Mr Tsipras is now trapped by his success. "The referendum has its own dynamic. People will revolt if he comes back from Brussels with a shoddy compromise," said Costas Lapavitsas, a Syriza MP.

"Tsipras doesn't want to take the path of Grexit, but I think he realizes that this is now what lies straight ahead of him," he said.

Holy cow. So basically, the Euro creditors do want a Grexit, and sent terms that would be rejected by Greece and stuck to their guns. Tsipras didn't want to go to a Grexit so when he called a referendum, he was hoping to 'lose' to a 'yes' vote and use that as a catalyst to take Syriza out of government and the ongoing non-negotiations. But of course, the 'No' vote won which meant that Tsipras wasn't able to get his ticket to get out of the ongoing non-negotiations and had to head back. This explains Varoufakis' exit better, and how on Monday a new Finance Minister arrived Brussels without a plan. Yep. The Greek cabinet war gamed the Grexit and didn't like what they saw, so they tried to get back to Brussels with a white flag, but of course, there can't be a plan because they didn't expect the 'No' vote to win so resoundingly. 

Knowing all this now makes me more frightened. Thanks to both Greece and China, commodities have tanked as has the AUD. We may well not notice it immediately, but our balance of payments got worse by default in Australia. All this stuffs made us collectively poorer, and it's just the beginning. Economists are now readjusting the RBA outlook, thinking there's more than likely a interest rate cut coming. If it does, well, so much for TwIRP. 

Introducing TwIRP

Not ZIRP

The news today is that not only is the RBA unlikely to cut rates any lower than the 2.0% where it sits, but it's also unlikely to start hiking them up for another 3years.

In the statement explaining the bank's decision to cut the cash rate to a record low 2 per cent, RBA governor Glenn Stevens omitted a key phrase used frequently in earlier statements to signal more cuts: "further easing of policy may be appropriate over the period ahead".

Financial markets are pricing in a just 30 per cent chance of a rate cut over the next 12 months, the longest odds for another cut in months. 

Rate cuts are good news for home owners and investors, but a prolonged spell of record low interest rates could be grim news for those who rely on returns from their bank savings, such as many elderly Australians.

Which sort of indicates that even if China's economy implodes under the weight of debt and the nation dissolves into civil warrior something catastrophic, the Property Bubble is unlikely to pop. That's the good news for those who took out (and continue to take out) stupendous mortgages. The RBA's right behind you, even when it says it might block you. Really. 2.0% - get over it! It's good (they say)!

The funny thing is that the RBA can't bring it self to go right down to Zero Interest Rate Policy because after all, Australia's economy is yet to implode and it probably sees those 8 increments of 25 basis points down to ZIRP as being valuable because - I dunno - China may implode and dissolve into utter chaos after all. Otherwise it can't construct a scenario where the Australian economy becomes worthy of high interest rates - as in more interesting - in the near future. 2.0% - get over it. It's just crap (others say)!

So caught between a rock and a hard place, it's likely going to stay on 2.0% for a long time.
As such, we may as well name this the Two-percent Interest Rate Policy: TwIRP.

Those Who Live In Glass Houses

News Corp is hilarious. No, really, they are.

Detail is scant as yet but the first initiative delivers further anti-avoidance powers to the Tax Office to recover unpaid taxes from multinationals and issue fines. The second is the so-called "Netflix Tax" through which GST will be extended to digital downloads from overseas. 

The rich paradox in this Netflix Tax is that it was urged upon the government by Rupert Murdoch's News Corporation, whose Foxtel pay-TV business stands to lose from digital competitors offshore. As previously revealed though, News Corp has now been identified as the Tax Office's number one tax avoidance risk in Australia.

You have to laugh. Especially when you consider it's the Coalition Government going after tax avoidance by multinationals, and we know Rupert loves him some Coalition Government; he put them there and now they're doing this.

At least, they say they're doing this. You can trust a Tory and their professed policy about as far as you are willing to stick your genitals into a meat grinder.

IMF Says Cut Rates To RBA

Doesn't Low Interest Mean It's Not Interesting?

This is news of sorts. The IMF wants the RBA to cut rates. If you ever wanted an indication that the global trend towards ZIRP in the first world, this is pretty much it.

Reserve Bank governor Glenn Stevens said last month that more rate cuts "may be appropriate" to encourage growth in demand and inflation, despite also previously warning that his power to boost economic growth by lowering interest rates is diminishing with every cut. 

But now the IMF has issued a clear warning to Australia, saying the economy has much spare capacity and the RBA may have to keep cutting rates to prevent "inflation expectations" from dropping permanently. 

Its latest World Economic Outlook also predicts unemployment will rise to 6.4 per cent this year, and remain at 6.2 per cent in 2016. Australian unemployment is currently 6.3 per cent. 

"In economies in which output gaps are currently negative [Australia, Japan, Korean, Thailand], policymakers may need to act to prevent a persistent decline in inflation expectations," the IMF has warned. 

Economists say the IMF's point about "inflation expectations" is serious because once consumers and employers believe inflation will be much lower in the future they will start behaving accordingly, with consequences for wages growth and spending.

So the IMF wants the Australian economy to continue to expect inflation as it has done for the last 40years. I don't think that's hard given the persistent gap between CPI and costive living as measured by the ABS. If the cost of living stays high, people will continue to have "inflation expectation", despite the artificially lowered CPI governments and the RBA use to claim inflation has dropped.

Be that as it may, the IMF is essentially saying that Australia is currently lining up with economies like Japan, South Korea and Thailand where there is deflationary pressures. You sort of wonder at the faith of people who keep pushing Sydney property prices ever upward. Gravity is pulling pretty hard if we're really lining up with Japan and South Korea.

It's also interesting that the IMF seems to think we're at the doorstep of a deflationary spiral without having had the property bubble pop. In Japan, the deflationary cycle started as a result of the property bubble bursting. The IMF is essentially saying the property bubble is not relevant, Australia is on the brink of a deflationary spiral based on the raw numbers. I have to confess there's a bit of cognitive dissonance there. Something's not computing.

Of course, should the property bubble pop, then we can contain there being a massive deflationary spiral simply because the heights the bubble has risen are so damn high. We can be guaranteed of ZIRP when the bubble pops, and then maybe even Australia's very own QE program after bail out of banks - but of course that would be the mark of a very advanced, mature, and uninteresting economy.

Doubting The Economists

You Sort Of Wonder About These Economists

This article has economists warning the RBA against going further with lowered interest rates. And it's pretty weird because the underlying assumption seems to be that eventually interest rates will head back to what have been historic averages.

Merrill Lynch senior economist Alex Joiner said that households who take on too much debt in the low rate environment could be caught out once rates rise. 

"Inevitably rates will move back to a more normal level and that is when we see the debt servicing ratio-income used to service debt, moving higher - households they will be much more sensitive to upward moves in interest rates," said Dr Joiner. 

Mr Montgomery noted in a website post on independent publishing service, Cuffelinks, that eventually "the price of those assets (stocks and property) will be pushed way too high," said "After that, a large number of investors will, sadly, suffer financially again – from buying too late and paying too much."

Basically, they're worried about asset bubbles. They're the same economists who weren't worried that property market was bubbling, not that long ago. It is true that if you borrow money and buy high  in an asset class, you stand to lose a lot of money when prices go down (like, duh). Yet it doesn't seem like that is what is fuelling the ASX; it's the yield of the shares that, even at 3%, sit higher than the 2.6% offered on term deposits. I'm sure the elderly with their nest eggs would rather not be there, but they're forced to be there for the yield. If the RBA cuts rates some more, it's not going to change that calculation. The point at which they had to take that risk came a long while back; way back when the RBA and these economists were busy denying there was a bubble in property.

Go Figure that one out! They suddenly noticed everything is looking a bit peaky rather than say, rosy? 

The problem is that in the long term, we are likely headed for a ZIRP regime in Australia because once the mining boom is truly finished and run its course, and commodity prices fall to historic norms - which is more inevitable than interest rates in Australia - then we won't have an economy worth investing in, which will reflect itself in the low to zero interest rates. ZIRP is - in extremis - the capitalist end game where winner takes all. This is what is not understood by this current Federal Government, which is quickly losing revenue and unable to make the cuts it wants to make on ideological grounds and not on practical grounds (and won't compromise either, which is an even worse story). 

Yes, in theory a lot of people would be in trouble if they borrowed money and thought interest rates would never go back up to say, 6-7%. but we haven't had the kind of economy to justify 6-7% interest rates since when Kevin Rudd was PM the first time around. we'd love that kind of economy compared to the post-GFC "new normal".  Worse still, the RBA is never going to raise interest rates just to scare off speculative investors when it thinks it needs to cut to stimulate the economy. I mean, when has that ever happened? If it's true the RBA won't be raising interest rates to scare off speculators, then it's only going to raise the rates if the figures are genuinely looking like the economy is overheating. For that to happen, unemployment needs to drop to under 5%. Again, that hasn't happened since Kevin Rudd was PM the first time around, and it would be a nice problem to have. 

You can only conclude these economists have got it ass-backwards. The Bust - the mining bust that follows the boom - has already set in. The economy is sliding downwards in growth and facing deflation. The Federal Government is crazy, clueless and crap. Industries are closing or declining and unemployment is rising. Older people have been forced to stick their term deposit nest eggs into shares (for dividends) and property (to collect the rent in cash) - the only two ways that pay better than the term deposits. Credit can hardly expand any more. China can't buy any more because they've crashed against the debt limit too. For various reasons the economy is already in much worse situation than say, even 2 years ago when Julia Gillard was still fending off Kevin Rudd the second time around. 

The markets might look bullish today, but it's against a stark backdrop of a long term secular bear market. Nobody is getting out unhurt; but for the older generation, they have to be in it just to pay their way in retirement. In that scheme of things, cutting the interest rate again is hardly the problem. The real problem is that we have a boatload of problems and this Fe'ral government hasn't go a plan except tax the poor and punish the poor and spread the misery amongst the poor. 

Importing Delfation

Nobody really talks about it much but you can get some amazing things at Daiso. Yes, the chain store that sells Japanese designed generic stuff for $2.80 each. From kitchen utensils to handkerchiefs to pens to hammers, they sell all kinds of things for $2.80 each. And it's not all crap; in fact far from it. 

I bought a kitchen knife from Daiso about 3years ago and it sees daily use. I compare it to the $25 (pre-GST I might add, English steel with 25year guarantee) thing I bought in the mid-90s and have to report that the Daiso knife is probably even more useful as the day-to-day kitchen knife. Forget the hundred dollar Global knife, this thing rocks. So essentially the kitchen knife cost has dropped 90%, if you're willing to use a Daiso knife. Bowls, ditto. Plastic containers, the same. Crystal glass wine glasses, handkerchiefs, LED torches, glass jars, the list goes on and on. Unless you're hooked on branding for your goods, you can outfit a house on $2.80 stuff from Daiso and get decent use value. Heck, I even got a pair of ebony chopsticks. Ebony! For $2.80!

Which all goes to show how much produced goods have been commodified. True, one can show off with one's Global knife set but everything one paid above $2.80 is suddenly suspect as marginal value. Yes, the Global is sharper and more durable. Yet I can sharpen the Daiso knife and when its edge is totally spent I can go get another one for $2.80. The value added on the Global knife has got stiff competition if all one does is slice vegetables, peel some fruit and cut up bits of meat. Getting value out of the value added in the Global knife is going to take serious skill and dedication. Which is fine if you're a chef, but I'm just not one of those guys. 

They haven't yet started selling electric guitars at Daiso, but even electric guitars have collapsed in price thanks to manufacturing in South Korea, China, Indonesia and Vietnam. You can get an archtop for $500. Think about that, and the price tag on a Gibson ES-175 (around AUD$5500) and you can see it's 90% down. They're building cars in India to be sold for $2000.00. They're still crap but it won't be long before they perfect it and it would be road-worthy here, and suddenly it would be 90% down on the Toyota or Ford or GM offering. Eventually you'll get a choice of a branded car with all kinds of extras or something for 10th of the price that gets you from A to B and not much style. It's not that far into the future, and it's going to kill branding. 

So deflation for goods is everywhere thanks to globalisation. It's pulverised our manufacturing sector in Australia. It's going pulverise a lot more. When I go out on weekends I see lots of people shopping furiously. But if they're buying bargain goods in huge quantities, I can see how retail would be having a difficult time, trying to grow profits. Margins would be flattering and you'd have sell a truckload of stuff before you made good profits. But that's just a problem for today and tomorrow. 

Here's what I can't figure out. What happens if China crashes, and the excess capacity for production dries up? Would that wind up the Globalised market in such a way as to deny us these cheap goods? If so would inflation suddenly kick in? It may well do. Or maybe China with all its state interventions never crashes, in which case everything is just going to keep deflating. That just doesn't seem feasible though, does it? Can we really have a world economy that produces more and more for less and less profit? In any case, I watch the Daiso effect of deflation with a certain amount of trepidation. The picture it paints about the globalised world of paper slim margins is quite frightening. 

The Post Capitalist World

Without The Growth, It's A Zero-Sum World

I cam across an article written by a Japanese economy professor who ran a historic analysis of what it means to be running Zero Interest Rate Policy (ZIRP for short in certain circles). It's a pretty straight forward article that even an economics novice can understand, and it centres round what it means to have ZIRP and why this signals a problem.

Japan is running interest rates lower than 2.0% for a couple of decades now. Germany has been doing the same for some time. The level of low interest has not both seen since the days of the Reformation and by that we mean the days of Genoa during the wars that saw the rise of Protestantism in Europe, thus splitting away the fiefdoms controlled by the Catholic Church, effectively stunting the growth of lending to the Catholic Church by the bankers in Genoa.

The point is, that the extraordinary length of ZIRP in our time is pointing to something extraordinary in the history of capitalism itself, and it essentially comes down to this: Capitalism has ceased to self-replicate at the rate it has done for most of modern history that extends back as far as the Reformation. Economic Growth and Modernity were interchangeable for a very long time, but we've arrived at a point where there is no scope for growth in some of our advanced economies. The growth won't come because in most part we've hit a saturation point for where capital can be applied.

The article goes into some quick schema to paint a picture which can be reduced to a simple formula. If an economic unit produces more, then the quantity of production the increase in production and subsequent sales can be understood to be on this axis which we can call 'X'. Another axis's the rate at which we produce and sell these goods and services, whites essentially the productivity. We can call this Axis 'Y'. Combined, the 'X' and 'Y' axes provide a field which is the GDP of the economic unit. When taken at the national level, what we find in advance economies is that we can't seem to grow quantitatively and we can't seem to grow qualitatively. So our GDP stagnates.  

The only other axis is actually growth in the virtual and cyberspace. And this is why there has been growth in the financial sector and growth in the internet and technology businesses. This is the 'Z' axis which has exploded comparison to the stagnant growth which befell the 'X' and 'Y' axes growth in the first world.

Up until 1980, there was consistent growth in modernity because there was space to grow into. Since 1980, we've pushed for globalisation so that there was more economic space to grow. As of 2008, the first world economies have hit the limit. This also dovetails with the drives for productivity sought by business and governments since 1980 where we've seen offshoring of manufacturing and attendant mass lay offs in the first world. In its place we've seen the greatest growth in the space created by technology, whether it is in advanced financial instruments and high frequency trading or simply high-tech industries that are off-the-charts in valuations as soon as they list.

It's not as if the 'Z' axis opened up because of the limits to growth on the 'X' an 'Y' axes, although there is a partial relationship between the need for growth and the massive rationalisation that high tech brings. Most of the gains in the 'Y' axis have come from the dividends of the 'Z' axis. The 'X'and 'Y' axes can't grow because the world is just about saturated with the economic activity of the first world.

What The RBA's Drop To 2.25% Tells Us

The whole world is experiencing the limits of growth along the 'X' and'Y' axis. The Central Banks in Europe are also running historically outlier low interest rates and even ZIRP in some countries. It's no coincidence then that the RBA has been running the lowest interest rates in its history, and this week set a record low 2.25%. The shenanigans of Federal politics aside, it's interesting to note that it comes at a time when the forecast for growth in Australia keeps dropping.

Combine this with the fact that the automotive industry is pulling out of Australia and myriad manufacturers have had to close their doors in the short time the Coalition Government has been in, and you get the picture of an economy that is quickly running out of ways and places to grow. It's one thing for Joe Hockey to tell the world leaders that what we need is growth. We sure do, Joe; but if there is no room for it in the physical world relative to the G-20, then it's a bit like fish in a crowded fishtanks saying what they need more of is water.

What's become even more stark and obvious with the retreat of commodity prices to their historic norms, is that absent the income from mining, we suddenly are back to being that economy thetas bloated in the service sector. And while this can be roughly divided into to categories like most things - good and bad - the glaring truth is that the manufacturing we lost is never coming back and even if it did, it would have no economic space in which to grow.

In this context, it would have been (and still very much is) imperative to to grow along the 'Z' axis which would entail growing the tech sector, growing businesses that operate in the virtual space, and look to becoming a force in 'Z' space. Odd then, that we have a government fixated on miners, bricks and mortar retail businesses and a degraded numpty version of an NBN. The complete array of policies concerning business and the economy is fundamentally backward looking and fails to take in the evolving problem.

We're not investing in tech or education or for that matter paying for students to learn things that would help them survive the evolving economy. Our government is trying to off-load those costs back on to the people and wipe its handoff the responsibility, exactly at time when a strategic view needs to be taken as to what kind of industries can be imagined and nurtured along the remaining 'Z' axis of growth. Instead the investment money has flooded into real estate - mostly because those investors get to borrow money so cheaply, this forming a positive feedback loop, but also because they have so few alternative options to invest but on bricks and mortar.

The popping of the Australian property bubble may never come - after all the guys at Zero Hedge have been saying China's economy is doomed and somehow the thing keeps going, and if China keeps going there's no reason why Australia's property bubble should collapse. If the GFC didn't pop it, then god only knows what it would take. But the distortions created by the property bubble are here to stay, putting a gigantic brake on growth. Eventually the RBA may well cut interest rates down to the ZIRP. In which case we will have arrived at the end point of capitalism without having made any investments into surviving what comes after traditional capitalism completely matures.  

The Problem With The Stimulus Packages

The greatest irony of Tony Abbott's tenure as Prime Minister is that having promised to be a Infrastructure Prime Minister, he hasn't really done much of any of it, and the infrastructure he did want to build was roads because let's face it, it's about the political donations coming in from general construction companies. You can't accuse them of corruption, but you can sure charge them with crony capitalism as Bernard Keane has done.

Again, we've seen this development in other countries but basically big government contracts are sold as good for jobs, and investors in General Construction companies make out like bandits on these projects. Australia has a peculiar development called Private Public Partnerships whereby the government refuses to go into debt and sucker investors are given the exploding doll sold to them as a good deal. You'll notice that once built, those roads really don't create more jobs or economic activity in of themselves. It's amazing that they get classified under Capital Expenditure. But these tollways Tony Abbott's backers want to build, are simply unlike factories that actually produce things or for that matter a digital workspaces that churns out apps. They don't contribute to the 'X' axis of production and they're only marginal contributors to the 'Y' axis of productivity, not to mention having no impact on the'Z' axis.

Equally stupid then, is the belief that we can have a building-led recovery. I know it flies in the face of the way our economy gets reported, as well as the housing sector making up 25% of our GDP,  but a house that's once built does not contribute to any of the 3 axes. The worst use of capital going around is all the debt piling up on the private sector's ledger as mortgages. It's good for the banks but it has much, much much less of a future than the NBN. In fact we're seeing this very problem unfolding China because they keep building the ghost cities in order to pump up the GDP figures but those ghost cities, once built, are contributing absolutely nothing to the 3 axes of economic space while the fastest expanding and most successful Chinese venture is probably Ali Baba, an internet market.

It's the same in Japan where fro 20years the government has unleashed stimulus package one after the other and still growth and the 2-3% inflation everybody so desires eludes the government of Japan. All those stimulus packages were one-off spends that contributed very little to the'X' and 'Y' axes over the same time span. The most healthy growth in Japan has been the IT sector. This pattern is repeated in the UK, the USA, and other members of the G8 ...except Russia where frankly, nothing makes sense except digging up more oil.

This is why I was banging on about the NBN prior to the September 2013 election. It really is our only hope for a future with a growing economy. Instead we voted in a government that is on the whole insensitive to that reality and hastily knobbled it to help out some backward looking cronies. Unless that gets rectified, in the years ahead, we'll come to see that this Coalition government was responsible for screwing up the future of this country.

Conversations Around The Traps

Who Suffers From Zero Interest Rate Policy?

Zero interest Rate Policy or ZIRP as it is known in some circles has been going on for two decades in Japan. It has also been going on for 7 years in the USA and Europe. The reasons have ostensibly been from keeping asset prices to stopping banks from toppling over due to lack of liquidity, through to keeping people employed. The extremely accommodating policy has been running parallel with the Quantitative Easing program in the US and Europe which have somehow helped to prop up asset prices in bubble condition around the globe, but also not spurred growth as promised.

The way the traditional/classical economy was supposed to work was that lower interests would fund capital investment for the next phase of economic growth. Instead the low interest rates have allowed speculators to place bets at lower cost, while the piled up debt has eaten into future growth in a big way. The point of all this is to say, the things the easy money has gone towards have not been exactly productive or helpful, while there are people who are genuinely suffering because interest rates have been kept so low for so long.

For instance retirees in America and Europe with some amount of money saved up during their working lives would be finding that they won't be living off the interest of the money they saved, but be forced to eat into their savings just to survive. This sort of thing can be seen as a breaking of the social contract. There would be a whole generation of kids growing up without learning about the virtues of saving because  they've never seen interest payments on their bank accounts. I don't think this is a good thing because we're raising people who haven't seen the benefits of saving and compound interest.

Worse still, with something like QE going on at the same time, Zero Interest rate translates into a situation where you cannot sit on cash because inflation is eating away at that value; and you can't stay in bonds because whole countries have been threatening to default for the last 3 years. That leaves equities or foreign currency trades, and they're no guarantee of a return.

In fact, it's worth asking at this point in time why people who save should suffer at the hands of the Central Bank while it essentially rewards people who go into debt to buy into positions. Why is it that people should not sit on their earnings as savings? If deflation is such a threat, then why is it so bad if the man on the street is able to get more for less?

Frankly I think the world is getting ripped off.

Politicians Lie, But Must They Be Brazen About It?

I was in a conversation earlier tonight with walk-off HBP, and the issue came up about how the Murdoch press essentially insist on telling non-truths and heavily-spun tag lines, all of which amount to nothing but lies. It's like an Orwellian thing where untruths are shouted out loud until everybody accepts it as the dominant discourse and acquiesces.

But then Tony Abbott gets up and celebrates the repealing of the Carbon Price, characterising it s this bug bear in the economy that was raising people's costs of living while not doing anything at all for the environment, and that his government is a "conservationist" government. All of these things are wrong. The Carbon Price was hardly a blip in the rising retail power prices, it was contributing to the reduction of our emissions, and there is no way you can call a government that insists on dismantling the Carbon Price system a conservationist government in any dialect or accent of English.

It's an astounding thing that we have a Prime Minister that stands there and spouts untruths as if they were truth, pronouncing white is black and black is white. I can accept that politicians will work the facts of the matter in their favour through spin, and that they sometimes get it wrong, making them liars after the fact. I just can't recall a single Prime Minister of this land lying knowingly with a straight face and expecting the people to buy it. This isn't "no child will live in poverty" things where a politician simply gets the scope of the problem wrong. These things happen and I don't judge too harshly. Going right back to Malcolm Fraser and looking through all the NSW premiers, I don't think I've seen a single head of government lie with a straight face as Tony Abbott does.

This is a person who knows the science but chooses to ignore it; understands the facts and chooses to deny them; and then acts on the worst possible advice for ideological reasons and then says he is something that that he has never ever been; and that the ignoring and denying of science and facts and going against them for ideological reasons represents something that is positive for this country when it clearly is not. For Abbott to characterise his government as 'conservationist', he may as well as be saying his is a ballerina government, or an artistic government, or a caring compassionate government, or a forward-looking government. These things are equally Un-true of his government as the expedient, idle, lunatic, conceited claim that his is a conservationist government, especially having repealed the Carbon Price legislation, and telling us this at the press conference to announce the repeal.

I've just never seen anything like it. And my mind boggles, my brain explodes... It's like a never ending torture of our minds.