Get Ready for an Epic Boom and Bust

It looks like the expected Fed rate hike is going to keep the stock market on hold for a while.

The release of the Fed minutes from the September meeting overnight told a story that we already know. That is, the Fed is keen to raise rates sooner rather than later.

That they didn’t increase rates at the September meeting was apparently a close call. In fact, the minutes reveal that some Fed members are now concerned over the institution’s credibility if they continue to wait.

I’d say it’s a bit late for that…but it goes to show you how conflicted the Fed really is. That is, it set a bunch of requirements about what it wanted to see before it would raise rates again. When these occurred, it held off for reasons that weren’t part of the initial requirements.

The fact is the Fed is terrified of raising rates and causing stock market volatility. And they’re terrified of raising rates and potentially causing a recession.

Funnily enough, a CNBC article raised the point that some Fed members want to raise rates to avoid a recession:

Federal Reserve officials who favor hiking interest rates worry that waiting too long could send the country into a recession.

At an unusually divisive Federal Open Market Committee meeting in September, hawkish members said history holds a worrisome lesson for a central bank that has kept a historically accommodative monetary policy in place for the past eight years.

“A few participants referred to historical episodes when the unemployment rate appeared to have fallen well below its estimated longer-run normal level. They observed that monetary tightening in those episodes typically had been followed by recession and a large increase in the unemployment rate,” said a summary of the meeting released Wednesday.

The worry is that if the Fed waits too long, it could be forced into having to raise rates aggressively to slow the economy.

The Fed is right to worry about causing a recession. As I pointed out last week, they ALWAYS cause a recession by raising rates.

Or maybe that’s not the right way to phrase it.

In a market largely left to itself, a recession isn’t caused by anything, or anyone. It just is. It’s simply a part of the business cycle. That the Fed raises rates as the business cycle heats up is part of the cycle, too.

Recessions are a natural feature of markets and capitalism. That we have tried to tame them is a reflection of our own hubris and arrogance.

Sure, we can avoid them in the short term, or make them less severe by lowering interest rates, increasing government spending, or whatever. But we can’t, nor should we want to, eradicate them completely.

In Australia’s case, we’ve done a pretty good job at eradicating them completely. 25 years and counting without a recession. And with China stimulating its way to prosperity, there are no immediate catalysts on the horizon to slow us down.

But if you really want to congratulate someone for Australia’s unprecedented growth run, don’t look to the government. They’ve merely been present during this growth phase.

Thank debt. It’s only because debt levels have continued to rise that Australia’s economy keeps expanding. I don’t have a chart to show you absolute debt growth, but this one from the RBA, showing debt as a percentage of household disposable income (left-hand side), does a pretty good job of telling the story.

The right-hand side tells you how we’ve managed to carry this increasing debt load — via lower interest rates.

Household Finances


Source: RBA
[Click to enlarge]

This debt growth has most notably translated into house price growth. Housing is highly leveraged, as most buyers need to take on significant amounts of debt to get into the market.

So it’s no surprise to see growing debt levels translate into rising house prices.

But wait, there’s another ‘end of the boom’ forecast out there. Bloomberg has the story:

Sydney’s housing boom is coming to an end, as curbs on investor lending and a raft of new developments combine to depress prices, according to QBE Insurance Group Ltd.

After surging 56 percent in the past four years, the median house price in Australia’s biggest city is forecast to remain broadly flat in the next three years, QBE said in its annual housing outlook released Thursday. Sydney apartment prices are seen falling 6.8 percent by June 2019, as slowing rental and price growth damps investor appetite for property.

Of course, when you’ve got a dog in the housing fight, booms end with a whimper, not a bang. The report is actually from QBE’s mortgage lending insurance arm. They would never release a report forecasting anything more bearish than a flat-to-slightly-falling housing market.

If you’re in Melbourne, don’t worry, they have a pretty precise idea of where prices are heading over the next three years:

The boom is also coming to an end in Melbourne, where the median home price has risen 33 percent in the past four years, the report said. House prices will fall 0.6 percent by June 2019, and apartment prices by 9 percent, QBE said.

Look; don’t waste your time with these self-serving forecasts. If you want to know what’s happening with the property cycle, you simple have to listen to Phil Anderson, of Cycles, Trends and Forecasts. Phil reckons a mid-cycle slowdown is approaching, and then it’s off to the races again for an epic boom and bust.

Cheers,

Greg Canavan,
For Markets and Money


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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