We’re approaching the 10th anniversary of the Lehman Brothers’ collapse.
The last decade has been like no other in financial markets.
Never before in history have central banks been so actively involved in supporting asset prices.
This was all done in the name of ‘trickle down economics’…the wealth effect would filter down through the economy.
Well, the theory is fine, but in practice it hasn’t worked.
The rich are getting richer and the rest are stagnating.
The other day, the US Federal Reserve reported that the top 1% controlled 38.6% of the wealth in the US in 2016.
Whereas, the bottom 90% held 22.8% of the wealth.
If the objective of the Fed’s policies was to spread the wealth around, then, by its own numbers, it has been a dismal failure.
But we already knew that.
Over the past decade, the divide between the haves and have nots has never been wider. Rest assured, in due course, the markets will close the gap.
After a decade of stimulus, you’d think we would have economic lift off, but the central banks have got very little bang for their buck.
The following headline is from a recent ABC News story…
Source: ABC News
Here’s an extract…
‘The Government keeps reassuring workers that wage growth is just around the corner — as long as strong employment growth continues.
‘The logic is simple: the more Australians that find work, the tighter the labour market becomes, and the easier it is to bargain for a pay rise.
‘But a leading investment bank has warned that even its most far-reaching economic forecasts show no meaningful change in the unemployment rate.’
Despite all the reassurance that growth is ‘just around the corner’, it’s proven to be a very long and arcing journey.
The reality is a good chunk of the newly minted wealth is trapped at the top end…compounding on the balance sheets of the one percenters.
The vast majority of the economic activity is driven by the 90%ers. Those who go to work, pay the bills, try to save a little and make a dollar stretch further.
Competition is fierce for this dollar. Hence, the permanent ‘SALE’ signs in shop windows and the closure of retail chains.
The disposable dollar is not being disposed of as easily these days. People are looking for bargains.
Invariably, lower margins means more manufacturing is outsourced to countries with low labour costs.
This price reduction dynamic filters its way through the economic food chain.
Which is why we have stagnating wages in the developed world.
As soon as wages get too high here, the work is outsourced to a lower cost nation or automation is introduced into the workplace.
Employment growth — as measured by the Australian Bureau of Statistics (ABS) — is fake news. The definition of ‘employed’ is a joke.
A more accurate reading on Australia’s ‘un and under’ employed is produced by Roy Morgan Research…you can find the latest data here.
Roy Morgan Research uses a ‘pub test’ definition for employment…not this ‘one hour per week’ rubbish the ABS deems as statistically ‘employed’.
According to the June 2018 report published by Roy Morgan Research, the Un and Under employed figure is 18.4%.
Prior to the GFC in 2008, the figure was around 11–12%.
How can the government possibly make reassuring statements and sound decisions based on inaccurate data?
The investment bank (quoted in the ABC article) is right, there is no meaningful change to employment in the future…there is simply too much slack in the labour market.
The RBA will keep interest rates on hold for two reasons
Firstly, the Australian economy is not doing as well as they tell us.
Secondly, and more importantly, the RBA encouraged far too many people to take on far too much debt.
Raising interest rates would expose the folly of this short-sighted growth ‘at-all-cost’ policy.
The following chart, on how our household debt compares to other major nations, has the RBA’s finger prints all over it.
And it’s the ‘onward and upward’ trajectory of that red line that reveals the secret behind our record breaking recession-free run. We have simply borrowed our way to economic ‘prosperity’.
Our GDP numbers are yet another example of ‘fake news’.
All that ‘so-called’ economic growth is nothing more than a reflection of our nation’s willingness to go deeper into debt.
The official cash rate will remain at 1.5% for now.
Contrary to popular belief, expect the next movement in rates to be down NOT up.
The RBA has painted itself into a corner with its blind pursuit of economic growth. Shame on them for being so short-sighted and data driven.
Why rates are going down, not up
There are simply too many deflationary forces in the global economy.
China cannot keep expanding its debt base at the same rate as it did over the past decade. With an excess capacity to produce ‘things’, all it’ll take is a tightening in credit markets for China’s factories to go into overdrive (to generate cashflow to meet loan obligations) and export deflation around the globe.
Boomers are 10 years older than when the last credit crisis hit.
On a daily basis, more boomers are moving into retirement…spending less and borrowing less.
Millennials — burdened with student debt — are incapable of picking up the borrowing slack created by retiring boomers.
Private and public pension funds are woefully underfunded. When the next crisis hits and this charade of having nearly enough capital to meet promised payments is exposed, tough decisions are going be made on how deep the cuts to pensions need to be. Retirees with even less money to spend is not good for GDP growth…or public confidence.
Higher energy prices take a bigger slice out of household discretionary income pie. Which means there’s less money available to spend on the ‘nice to haves’.
And, unofficial rates are on the rise. Home loan rates are being increased due to banks facing higher funding costs.
The flood of cheap money, supplied by central banks over the past decade, has largely been stored in the dams of the wealthy.
Some has trickled out, but not enough to float all boats higher.
Many households are stranded in a stagnant pool…going nowhere fast.
Bailing out just to stay afloat…as evidenced by this headline from Macro Business on 5 July 2018..
Source: Macro Business
A rise in home loan interest rates will, literally, sink them.
Overly indebted households.
Stubbornly high un and under employment.
Global debt is US$100 trillion more than it was in 2008.
Rising fixed costs…energy, Government charges, insurances.
A widening of the divide between the haves and have nots.
The most expensive asset markets in history.
This is the sad and sorry state we find ourselves in after a decade of stimulus.
In a fair and just world, central bankers would be held accountable for such a disastrous outcome.
How — by any stretch of the imagination — do you possibly conceive and believe that the cure for a debt crisis is more debt?
In any court, the findings against these serial bubble-blowers would be damning.
But we know this is not going to happen…at least not until the next crisis hits and the public demands that heads should roll.
By then it’ll be too little, too late.
The damage will have been done.
When the cycle turns from expansion to contraction, there will be two types of investors…victims and victors.
Victims will lose money and sleep. They’ll spend their time involved in class actions, advocacy against institutional negligence and lamenting how silly they were for buying into the illusion of prosperity.
Whereas, to the victors go the spoils. They’ll devote their energy to identifying how best to deploy their capital into a deeply discounted market. If any sleep is lost, it’ll be due to the excitement associated with endless opportunities.
Which one are you going to be?
Editor, The Gowdie Letter