RBA Set to Lower Rates to Zero

What a difference a week makes.

The correction is over and now it’s back to normal trading conditions…or at least, that’s what they would have you believe.

Nothing has changed over the past week.

The US market is still over-valued.
Debt continues to pile up.
The economy remains in a funk.
Even with higher power prices and oil costs, inflation is still proving difficult to create.

As reported by ABC News on 1 November 2018..

‘Australia’s inflation rate has again slipped below the Reserve Bank’s target range of living costs increasing by 2-to-3 per cent over the year.

‘The consumer price index rose 0.4 per cent over the September quarter, or 1.9 per cent for the year.

‘That is a weaker inflationary pulse than the 2.1 per cent recorded previously.

‘Underlying inflation — the RBA’s preferred measure which strips out volatile items such as food and fuel — fell to 1.6 per cent over the year, its lowest level since early 2017.’

The real winner from higher inflation is Government

This obsession with an inflation target still amuses me…why would anyone in their right mind want to see prices go up?

Who wants to pay more for fuel, food, childcare, holidays etc.?

According to the ABC News article…

‘Low wage growth [is] holding down inflation’.

Let’s follow this ‘logic’ through to its ridiculous conclusion.

If we have high wages growth, then we’ll have the RBA’s much-sought-after higher inflation.

With me so far?

Higher wages feed into higher prices.

Across-the-board higher prices trigger the higher inflation reading.

Those extra wages then go towards paying for higher priced goods.

From a household budget point of view, it’s pretty much a zero-sum game.

But this is not about real benefits to you and me…it’s about creating the illusion.

The real winner from higher inflation is Government.

Higher wages results in bracket creep. More tax revenues flow in.

Higher inflation dilutes down the value of debt…meaning people and Government (especially those that run huge deficits) can borrow more to keep the debt-funded growth model ticking over.

Inflation creates the illusion of growth…keeping the masses dumbed down.

And the people fall for the ‘we need inflation’ spin…hook, line and sinker.

Are you prepared for an Aussie housing collapse? Find out before it’s too late.

Why is inflation good for us?

Barely anyone questions why inflation is supposedly good for us.

Perhaps it’s just me, but I have yet to meet one single person who answers in the affirmative when asked, ‘Do you want to pay more for going to the movies? Or filling up the car? Paying rent? Seeing the doctor? How about $7 for a regular flat white?’

Yet, when asked if inflation is good, they all nod like one of those toy dogs.

Go figure.

Well, whether they do or don’t want inflation, they’re not going to get it.

When the US market resumes its jagged journey to lower levels, deflation — the sworn enemy of central banks and governments — is going to make its long awaited appearance.

Deflation — on a sustained basis — hasn’t been seen in developed economies since the 1930s. We have only ever lived with inflation.

It’s near 90-year absence means no one has any experience with how a deflating economy works. What a nasty surprise that’s going to be.

Decades of conditioning is facing massive disruption.

The RBA meets on tomorrow to decide the fate of our cash rate…well, we already know the answer to that. Rates remain on hold.

But cast your mind back 18 months or so and all the talk was about rising interest rates.

John Edwards (an adviser to Paul Keating between 1991 and 1994, chief economist at HSBC Bank and former RBA Board member) made this observation in July 2017 (emphasis is mine).

‘”Where does this leave the Reserve Bank of Australia?” Edwards mused in his piece.

‘My guess is that it is already thinking about a program of rate increases that will continue for several years.

‘It seems to me that something like eight quarter percentage point tightenings over 2018 and 2019 are distinctly possible, if the RBA’s economic forecasts prove correct.’

Sydney Morning Herald

To be fair, Edwards was not alone. Rates going up was a widely held opinion.

The caveat of ‘if the RBA’s economic forecasts prove correct’ was a wise one.

The RBA, like most central banks, have a woeful record in forecasting economic conditions…especially since the events of 2008.

After nearly 90 years of manipulating human behaviour — via interest rate settings — to produce pre-determined outcomes, central banks are flummoxed as to why the ‘animals in the circus’ no longer want to jump through the same hoops.

People are tired — boomer consumers are getting older.

People are burdened with debt. They’ve done the maths and know the employment landscape is vastly different to the rosy picture painted by the ABS’s phony data. Households are saying, ‘We no longer have the desire or capacity to take on debt like we used to.’

People are being waged (literally) against each other — incomes in India and China are much lower than in Australia. Thanks to technology, outsourcing has never been easier or cheaper.

If labour costs get too high, then ‘whoosh’… the job has gone offshore or to a ‘never sick; always there; doesn’t waste time on social media’ artificial intelligence (AI) replacement.

Think about it. Wage suppression has been happening in the best of times. Central banks have pumped the system up with excess liquidity, asset prices are high and confidence levels remain in the positive.

Wage suppression will be replaced by wage depression

What happens when the cycle turns and we see the worst of times?

A period when liquidity is drained from the system, asset prices plummet and confidence levels sink like a stone?

Wage suppression will be replaced by wage depression.

In the ABC News article there was this interesting bit towards the end…

‘AMP Capital’s Shane Oliver says the data confirms the view that a rate hike is a long way off, and the chances of a cut from the RBA are rising.’

Long-time readers of The Gowdie Letter know my view on Australian rates has always been they’ll head down…not up.

Being right early is a very frustrating exercise.

Trends take their own sweet time in playing themselves out.

You just have to sit, watch and wait.

The same holds true with the US share market.

It’s over-valued.

It will fall…and fall hard.

But, in the interim, it ‘ducks and weaves and dances’. Artfully avoiding the uppercut that’ll send it to the canvas.

Confidence is high. Defences are low.

But the market is tired. The spring is gone from the step.

Eventually, the market will stagger and reel and flay about, but you know from its ‘jelly legs’, that it’s going down for the count.

And when it does, it’ll take the economy with it…and Aussie interest rates will move swiftly into the zero-bound range.

Regards,

Vern Gowdie,
Editor, The Gowdie Letter

PS: Economist Warns: Overvalued Housing Market Set to Implode. Download the free report now.


Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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