We read Winston Churchill’s epic book ‘The Second World War’ about 10 years ago. After last night’s epic match between NSW and QLD, we remembered his famous phrase that came at the end of the book:
‘In war, resolution; in defeat, defiance; in victory, magnanimity’
The game deserves a Churchill quote, and it pretty much sums the night up. All players were resolute, Queensland were defiant, and NSW magnanimous. And we’ll be magnanimous in victory too, if only because there are two more games to go.
But last night was a victory for the underdogs and the bears. For the uninitiated, Lang Park (Suncorp Stadium prior to corporate PR coming into play) at State of Origin time is one of the most hostile sporting environments in the world for the visiting team. It’s been more than a decade since NSW won the first game of the series there. Doing so against the odds last night was a truly epic performance.
Speaking to Queenslanders before the game…well, they thought they just couldn’t lose. Eight years of victory will do that to you…
There’s a lesson there for the stock market bulls too. Year after year of gains and faith in central banks makes the intellect lazy. You start driving in the rear view mirror and take less notice of the road ahead.
The focus is on which central bank is doing what and when, rather than seeing the underlying damage that these policies are inflicting on the economy. That’s a product of the media responding to the market, which is responding to the media. Take this explanation of the overnight action from the Financial Times:
‘US stocks held close to record highs while highly-rated government bond yields fell sharply as the prospect of continued support from the world’s central banks dominated market action.
‘Expectations that the European Central Bank would unveil a package of policy measures when it meets next week were bolstered by the release of weak eurozone economic data.’
Pavlov’s Dog is back…not that he ever left. He’s just left the US Federal Reserve’s house and shown up on the ECB’s door step. Stronger than expected data in the US economy no longer worries the bulls…but weaker than expected data in Europe is now the catalyst to buy!
Seriously, we’re all going to look back on this period in a few years’ time and ask ourselves, ‘what the hell were we thinking?’ Well, the short answer is that not many are actually thinking. They’re just doing. Which is fine while the going is good…but then it won’t be…what’s the plan then?
Meanwhile in Australia, the housing propaganda keeps on flowing. George Orwell once said (we’re paraphrasing) that the role of journalism is to write what others don’t want you to write…everything else is just PR.
We thought of this when we saw the following headline in yesterday’s Sydney Morning Herald:
‘Housing affordability best in 12 years thanks to low interest rates, says index’
The ‘index’ comes from the Housing Industry Association (HIA) and the Commonwealth Bank, two highly impartial observers of the housing market.
House prices have just experienced a mini boom (thanks to the RBA’s massive interest rate cutting program) and the median house price in Sydney is now around $825,000. Yet the ‘index’ compiled by the HIA and CBA says affordability is best in 12 years? What a joke.
While the HIA’s chief propagandist, economist Shane Garret, acknowledges that Sydney is the least affordable market, he still manages to come out with this…presumably with a straight face:
‘However, the impact of lower interest rates and continued earnings growth has ensured that home purchase affordability has improved over the past year for existing homeowners and those on the cusp of entering the market in the short term.’
Continued earnings growth? Would that be wages growth at its lowest level in 17 years, which is now below inflation and therefore negative in real terms? What about wages growth per capita?
Look, there’s nothing stopping an industry talking gibberish in order to benefit their bottom line. All we ask is that you take this index’s finding with a grain of salt big enough to choke on.
What else is happening on this victorious morning? Well, there’s a little bit of good and a little bit of bad. On the ‘bad’ front, iron ore prices just hit a new low for the current move. Yesterday the spot price fell to $96.80. The recent bounce in the iron ore majors (specifically Rio and Fortescue) won’t last.
On the ‘good’ front, the value of construction work in Australia for the March quarter beat consensus estimates, rising by 0.3%, compared to expectations of a 0.8% fall. Residential housing construction registered a big gain of 6.8%, offsetting a minor fall in engineering work completed.
But don’t get too excited…engineering construction (which largely represents work related to the mining expansion) is set to fall dramatically next year, reflecting the end of the construction phase of the nations’ various LNG projects. It is highly improbable that housing will be able to take up the slack, given the relative differences of the size of each sector.
And keep in mind that as we head into a new financial year, the stimulatory effect of the RBA’s rate cutting cycle will have largely moved through the system. Does that mean you can expect more interest rate cuts to come in 2015?
We’re leaning towards that outcome, even though consensus says the next move is up.
Our reasoning is that Australia has turned into a debt-dependent economy, and when that happens sustainable, self-reinforcing growth is very difficult to achieve. We rely on growing household debt to boost house prices and bank profits, and on growing Chinese debt to underpin demand for resources.
When it becomes apparent that we’re stuck in a slow growth economic model (like our indebted foreign counterparts) the authorities will view monetary policy as the only politically acceptable growth lever.
The question is, will our foreign benefactors continue to lend to us at lower and lower interest rates? That question will become more pressing in 2015.
for The Markets and Money Australia