An Out of Whack Economy

We tried to teach an Irishman to juggle on the weekend. But that’s not the funny part. He worked as an engineer building an airport in Toowoomba.

An airport in Toowoomba?

Yer, I know. I tink ’tis a bit odd ‘swell.

You can rely on an Irishman to spot a construction bubble. But an airport in Toowoomba makes it blindingly obvious.

With the economy the way it is in Europe, the Irish need to take all the jobs they can get these days. And that usually means heading overseas. Sometimes to Toowoomba.

Our babysitter from back when we were seven years old and lived in Ireland is now a lawyer in Brisbane. Our best friend from back then is an English teacher in Vietnam. He went there after taking the New York Bar exam – one of the most difficult law exams in the world. Our neighbourhood bully, whose dad coached the famous Garryowen rugby club, recently popped up in Melbourne too. That’s everyone we know in the Irish workforce. And none of them are in the Irish workforce.

Ireland has gone back to its most trusted export – people. The reason is of course ‘du recession’, as the juggler called it.

You young whipper snappers don’t even know what a recession is!‘ said another juggler.

Yes, if you ask the Australians in Australia, it’s boom o’clock on Phil Anderson’s property clock and all’s well. Melbourne’s record auction weekend went down a treat with a high 74% clearance rate on 1317 auctions. (121 went unreported, so the actual results could be poor, but this is only statistics after all.)

The Melbourne property market is an excellent bellwether for Australia as a whole. The city used to be the business capital of Australia. Today it’s…well…what is it?

Lots of people want to live there regardless, according to the auction results. Largely because house prices there go up and so you can get rich. But do you think you could find all those Irish immigrants amongst the bidders? Unlikely. Fool me once…

There’s something that bugs us about all this endless prosperity Australia is going through. A friend just returned from a few weeks living in France. His $5 deodorant from here costs $1.50 over there. Good wine costs $5. (Find out how to get an even bigger discount on wine by time travelling to get it here.)

Everything is expensive in Australia. Except the stock market. That’s still 20% below its 2007 peak. So if Australia is prosperous enough to have $5 deodorant, why do we have a stale stock market?

Maybe stocks were overvalued in 2007 and are fairly priced now. Of course, today’s stocks are very different to the companies of 2007. Their earnings, their prospects and their risks are all different. So they could be even more expensive now than back then. Especially if you factor in the prospects for a recession.

If you’re optimistic about the wisdom of the market, you might think a recession is what the Australian market is pricing in with its poor performance since the financial crisis.

One man is on record when it comes to the timing of the coming recession. We’re not that confident about the ‘when’. But we reckon you can know the ‘why’.

The Austrian School of Economics, to which we subscribe, is the only school of economics that reckons recessions are a good thing. At least sort of. It’s a necessary realignment of the economy. But how did the economy get out of alignment? Here’s the key verse of the Keynes versus Hayek rap song where Friedrich von Hayek tries to explain to Lord Maynard Keynes how recessions come about:

The place you should study isn’t the bust
It’s the boom that should make you feel leery,
That’s the thrust of my theory, the capital structure is key.
Malinvestments wreck the economy.

Well, we happen to be in the boom here in Australia. And that’s why Markets and Money spends so much time ‘studying’ the artificial nature of our strong economy. It’s why we’re labelled pessimists.

Malinvestments come about because central banks encourage an artificial credit boom by keeping interest rates too low and pumping money into the economy. Some sectors of the economy are more interest rate sensitive than others (think housing) and so those sectors experience a boom while others miss out. The capital structure that supports the booming sectors (think banks) gets too big and the capital structure of other parts is left underdeveloped. The two get out of whack during the boom, and the recession is the realignment.

If the Austrians are right with their theory, we’re not just in for a recession. The entire world economy is way out of whack, given the size of the stimulus.

Over in the US, where stimulus is surging through the economy in the form of an $85 billion a month debt monetisation program and a $750 billion forecast government deficit, the scale of malinvestments don’t just suggest a recession is coming. They suggest something much worse. The same goes for China and Europe with their own stimulus policies. Award winning financial advisor Vern Gowdie reckons the Australian market will get a raw deal out of all this, to put it mildly. But he also has a long term plan to deal with it.

By the way, one of the world’s leading Austrian economists is coming to Australia soon. And we’ll be interviewing him for The Markets and Money. Keep your eyes peeled for more details soon.

Instead of learning about what a recession is, Australia’s young whipper snappers have taken to ‘like for rate’ on Facebook, report concerned parents. It’s a popular past time where youths click on a ‘like’ button for the pleasure of receiving a rating of their appearance out of ten by the likee.

As we said, maybe a recession wouldn’t be such a bad thing for Australia.

On another note, we’d like to invite you to click on our like button here if you have Facebook.


Nick Hubble+
for Markets and Money

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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