Australia – The Luckiest Miserable Country on Earth…

If all the year were playing holidays, to sport would be as tedious as to work.

William Shakespeare, Henry IV

So which is it? Is Australia the lucky country…or the miserable country?

At the end of July unemployment — reportedly — spiked to 6.4%, its highest level in more than a decade. And the inflation rate stood at 3%. These figures combine to form what’s known as the Misery Index. At 9.4, this index stood at its highest level in six years.

Fast forward one month and, miraculously, unemployment fell by 0.3% to reach 6.1%. According to the Australian Bureau of Statistics (ABS), the nation added 121 thousand jobs in August. Many of the new jobs were part time. Nonetheless this represents the biggest monthly job creation in Australia’s history.

Astounding. And dubious. But no more dubious than the previous month’s figures.

Lacking the time and resources to conduct our own nationwide employment research, we’ll stick with the figures the ABS concocted. Even with August’s massive job creation, the lucky country’s Misery Index still stands at 9.1 — higher than any time since the middle of the Rudd years.

But it gets worse. Prices for iron ore (Australia’s most important revenue earning export) continue to fall to new lows. Currently iron ore is trading below US$80 per tonne.

What else? Oh, the country’s current account is in the red. The current account measures the value of goods and services Australia buys and sells with the rest of the world. If Australia imports more than it exports, we run a current account deficit. The figures for the June quarter show a $13.74 billion deficit, following on a $7.8 billion deficit in the first quarter.

Woe is me. Did I make a huge mistake when I moved my family to Australia five years ago? Is it time to throw in the towel and head for…where?

Australia IS the lucky country

Every nation on Earth is facing its own problems. And almost all of them have far more serious issues than Australia. In truth, there is no country with a higher real quality of life and greater potential for growth than Australia. No better place to work, play, and eventually retire. If you’re reading this from anywhere within this lucky country, I imagine you agree.

So why all the gloom?

From a psychological perspective it boils down to the fact that people love to worry. We need something to focus our concerns on. There’s a reason I opened with the quote from Shakespeare. And it’s not just to sound erudite. (If I want to come off as erudite, I’ll…well…use words like erudite.)

If all the year were playing holidays, to sport would be as tedious as to work.

And if every day of the year produced fresh results proving how lucky you are to live in Australia and how bright the future looks, these results would get just as tedious. Eventually you would begin looking for dust in the corners.

Not such miserable data after all

Then what about all the negative numbers you’re reading in the news?

Let’s have a closer look at some of those figures now.

First the Misery Index, the sum of unemployment and inflation.

The latest inflation figures came in at 3%. This is right within the RBA’s target range. Here’s what the RBA says on their website:

The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over the cycle. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.

So the current rate of inflation ‘provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations’. And yet it somehow adds three points to Australia’s national misery. Hmm.

Then there’s unemployment, reportedly now at 6.1%.

Before continuing, let me be clear. Unemployment figures do matter. Particularly if you’re one of the people who’ve lost their job and are having trouble finding new work. That can be one of the most difficult times of your life, both psychologically and financially.

It’s why everyone should hold savings of at least three month’s-worth of income. You never know when you may need it. If you’ve invested all your extra savings to date in your super fund (lured by the generous tax breaks), that money is effectively locked away.

But it’s important to understand that each new batch of jobs data doesn’t always tell the real story. Among other variables, the labour force participation rate — the number of people actively looking for work — varies from month to month. A small uptick in this rate, as witnessed in July, can lead to a marked increase in unemployment figures.

Does that make Australia more miserable?

Have a look at the following table.

Average Monthly Misery Index by Prime Minister (1978–2012)


With the exception of Julia Gillard’s tenure (during the peak of the mining investment boom), every single period listed saw the Misery Index spike well above 9.1 at some time. And from 1978–1996, even the lowest points in the Index dwarf the current number.

I wasn’t living in Australia then, but if you were here during that time, I’ll wager that these weren’t 18 years of abject misery.

Iron ore and the current account deficit

Now let’s get back to iron ore.

Today’s lower price of iron ore and higher current account deficit are directly related. With iron ore making up around 22% of total Aussie exports, any fall in iron ore prices will obviously increase this deficit. And the iron ore price has fallen 40% this year.

Look at the following chart, published in the first quarter of 2013. It shows you the historical price of iron from 1998 and forecasts the price from 2013 through 2018.

(Note that the Bureau of Resources and Energy Economics (BREE) used free on board (FOB) prices, not the cost and freight (CFR) price. Generally, you’ll hear prices quoted in terms of CFR, which run a bit higher.)

I included this chart for a few reasons. First, it’s always good fun to look back on predictions with the power of hindsight. And in early 2013 BREE was forecasting FOB iron ore prices above US$100 per tonne through the end of 2015.

Now I’m sure the experts at BREE are well-qualified. But it serves to show you how tricky it is to get these things right. There are thousands of factors involved. You’d have about as much chance at predicting the weather two years in advance. That’s precisely why the Guild’s investment philosophy avoids speculating on tomorrow’s many unknowns.

Personally, if I’m going to follow anyone’s predictions on future resource prices, it will be Jason Stevenson, the Guild’s Resources Analyst. His analysis of the markets in Diggers and Drillers is second to none. And he’s predicting a bounce back in iron ore prices. He makes a good case for it too, and for how you can profit from the coming bounce.

The second thing you should note on the above chart is the historical price for iron ore. As recently as 2005 it was trading for well under $30 per tonne. You remember 2005, don’t you? It was during John Howard’s tenure, which — incidentally — ended with a Misery Index of only 6.1. Happy days!

Will iron ore climb back above $100 per tonne? Maybe.

In the meantime, the less efficient, higher cost producers are being squeezed out of the market. It’s already happened with Western Desert Resources. Earlier this month they went into voluntary administration. And Sherwin Iron went into administration in June.

Falling prices have also forced the closure of several iron ore mines, including the Chinese-backed Cairn Hill mine in South Australia, and ¬Territory Iron’s Frances Creek mine.

That’s how markets work. It will cause some short term pain, but in the longer run, the capital and labour involved in these inefficient companies will find a better use. And Australia — alongside low cost producers BHP and RIO — will eventually be better off for it.

How about that current account deficit?

As mentioned above, the latest quarterly figure for the current account deficit came in at $13.74 billion, or around US$12.78 billion. Let’s compare that with the US.

In the first quarter of 2014, the US ran a current account deficit of US$111.2 billion, after posting an $87.3 billion deficit in the fourth quarter of 2013. Of course the US economy is a lot larger than the Aussie economy. But have a look at the following graph:

You can see that during the last 30 years the US has run large, consistent current account deficits — with only a brief and tiny blip into the positive in 1990. Now I’m not saying that running persistent account deficits is something Australia should aspire to. But it’s hard to argue with the fact that the US has had a pretty good run over the last three decades.

The good news from the back page

Good news is less dramatic than bad news. Usually you’ll find the good news towards the back of the newspaper, or further down your screen if you’ve gone digital.

Let me give you a quick recap of recent back page good news.

First, the results from the most recent company reporting season. 54% of Australian businesses exceeded analyst expectations in terms of revenue. And 65% increased their dividends.

Tourism, another important revenue driver for the Aussie economy, is also on the rise. International visitors spent $30.1 billion in the last financial year, a 7% increase, according to Tourism Research Australia.

And, despite dire predictions, the GDP figures released earlier this month showed 0.5% growth for the June quarter. That’s not phenomenal, but it brings the yearly adjusted growth rate to 3.1%. This places Australia on the road for its 23rd consecutive year without a recession.

Long term investments, long term view

The point is, as an investor looking to enjoy your day to day life you need to take a long term, big picture view. This is by far the best way to keep your blood pressure from spiking in proportion to the latest news — and the market’s reaction to that news.

Lest I stand accused of taking in that big picture through rose coloured glasses, I’ll say this. There are plenty of hurdles Australia needs to overcome in the years ahead. Plenty of domestic and international challenges on the horizon.

And that’s a good thing. Who wants to live in a world where‘to sport would be as tedious as to work’?

The inevitable hurdles and downturns are why you have trailing stop-losses in place. To minimise those impacts when they do occur. And it’s why, at the Guild, we rebalance our portfolios each year. This ensures you are not over-allocated in last year’s winners and underrepresented in the sectors which had a tough run.

It’s also why, as you near retirement or the time you wish to access your investments for other reasons, your allocation strategy shifts towards less risky investments. More in cash and bonds, less in international stocks and property.

As your own horizon gets shorter, you want investments that won’t react to the latest iron ore prices or unemployment figures.

In the meantime, there’s no reason for nation-wide misery.


Bernd Struben

Contributing Editor, Markets and Money

Editor’s Note: This is an edited excerpt of an article originally appearing in the Albert Park Investors Guild communiqué .

Join Markets and Money on Google+

Bernd Struben is a contribution Editor of Markets & Money. He holds a degree in Economics and is a published novelist. Bernd’s career spans multiple countries on four continents. With his diverse background, he brings unique business insight and a libertarian twist to his columns and analysis in Markets & Money.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money