The Message About The Economy That No One Wants to Hear

US markets didn’t do much in Friday’s trading session. Weakness in US retail sales gave the Fed another excuse to keep rates on hold, so markets were happy enough with that and held near all-time highs.

From an economic perspective, though, the retail sales data wasn’t too healthy. Sales for the month of July were flat, against expectations of a 0.4% gain. Excluding car sales, retail spending dropped 0.3%.

But it’s only one month’s data…one piece in a grotesque and ever-expanding jigsaw puzzle that the Fed is trying to complete. The market seems to be betting that it will never get to the end of it. There will always be a reason for the ‘data-dependent’ Fed to hold off.

This is why stocks are trading at all-time highs, even while the economy limps along like a lame dog.

If you want to know where this will end up, look no further than Japan. As Bloomberg reports:

The Bank of Japan’s controversial march to the top of shareholder rankings in the world’s third-largest equity market is picking up pace.

Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy.

At this point, I’m genuinely wondering how many unprecedented campaigns Japan has to embark upon before someone, somewhere realises this is all a big joke, and that direct intervention in the markets and the economy will NEVER work?

Sadly, I’d say they have quite a few such campaigns up their sleeves just yet. Which means Europe, the US and Australia have plenty of monetary insanity left in the barrel.

Although in Australia’s case especially, it’s going to be a delicate balance. When the RBA cut interest rates by 0.25% a few weeks ago, it apparently meant the end of the property boom. From the Financial Review on 2 August:

The Reserve Bank of Australia has declared the threat of a property bubble is over after cutting the official cash rate to an unprecedented low to shield the dollar against a wave of global monetary policy stimulus and money printing.

Reserve Bank governor Glenn Stevens said in a statement after his penultimate board meeting that “the likelihood of lower interest rates exacerbating risks in the housing market has diminished.”

Where Glenn Stevens got that idea from is anyone’s guess. Low interest rates pushing asset prices up? What nonsense!

But two weeks after the cut, in this morning’s Financial Review, there’s this headline:

‘Home prices soar as buyers target slim pickings’

…followed by:

A Sydney house bought for $3.85 million two years ago sold for $5.15 million on Saturday as strong demand again outstripped measly supply in weekend auctions.

No bubble here, though, according to the RBA…

Given that Australia is experiencing the slowest wages growth in its history, you can only assume that the ongoing strength in house prices relates to an ever larger borrowing capacity.

If there has been a clampdown on lending recently, it’s hardly been broad based. Talking to a mortgage broker friend a few weeks ago, it appears the ‘crackdown’ related to gaining more certainty around foreign-earned income.

In his view, this was a way to restrict the flows of money (of dubious origin) coming in from China and Asia. As such, the crackdown would mainly impact the inner city apartment market, rather than the broader housing market.

I can tell you from anecdotal experience that banks have been increasing the amounts they will loan to residents in recent months.

That’s why house prices continue to set records, despite what the RBA thinks is going on.

Look, we like to put the boot into the RBA a lot. Quite frankly, they deserve more scrutiny and criticism than they receive from the mainstream media.

But readers often say that we’re merely complaining. We offer no solutions to the world’s problems.

That’s true. But that’s because the time for solutions was years ago. We’re too far down the rabbit hole to be talking solutions. There’s only bad, and less bad. Bad is to keep on doing what we’ve been doing for years…more stimulus, lower rates, more stimulus, lower rates…

If we keep going down this path, things will get very bad indeed. Or we could just stop pretending now; instead, we could try and work our way out of the problems associated with excessive debt using structural economic reform and hard work. That’s the less bad option.

Debt is just future consumption brought forward. By encouraging debt, we are encouraging society to immediately satisfy its wants…without having to work hard and make sacrifices for it in the first place.

In fact, we are rewarding that part of society that accumulates debt, while punishing those that save and defer their wants. How do you create genuine wealth with such counter-intuitive price signals?

The modern economic system has upended centuries of accumulated wisdom about how risk and reward works…about the relationship between creditors and debtors.

The modern economic system is broken. There are no painless fixes to a broken system. But no one wants to hear this message.


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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