The vice continues to turn…
‘Reject Shop shares plunged as much as 40% on Wednesday to 12-month lows after the discount variety retailer slashed December-half net profit guidance from $17.7 million to between $10 million and $11 million.’
As the name suggests, The Reject Shop does business in the lower end of the retail market. But even the ‘nickel and dime’ operators are not immune to the squeeze being put on household budgets.
The reasons given by The Reject Shop CEO for the profit downgrade are (emphasis is mine):
‘The continuing absence of real wage growth and increases in the cost of many basic expenses (including mortgage rates) ensures that competition for the discretionary spend of consumers remains high.
‘In addition, we have seen increased investment in promotional pricing across many retailers, particularly in the fast-moving consumable goods (FMCG) space, resulting in additional investment in our FMCG pricing to ensure our value proposition is not damaged.’
Stagnant wage growth. Higher loan repayments. Increased investment in automation.
These factors have been at play in the economy for years. None of this should come as a surprise. The fact that it does is due to the well-rehearsed propaganda campaign from the RBA, ABS and Treasury.
You know, the one that goes like this…our record recession-free run; improving GDP growth; low unemployment.
The ‘official’ spin paints a picture of an economy enjoying relatively good health, when the reality is quite the opposite.
We’re bloated with debt. That’s the truth behind our economic ‘successes’. In mortgaging our future to the hilt, we’ve made the numbers look good today.
Our booming economy is nothing more than a reflection of our willingness — through ignorance or stupidity — to borrow our way to prosperity.
Debt is a means of having today what we would otherwise have saved for tomorrow.
Debt drags future consumption into the present day. And boy, as a nation, we’ve brought years of expenditure forward.
The Reject Shop and other retailers are suffering a slump in trade because of the consumption vacuum we’ve created.
Compounding the problem for retailers is the increase in lending rates. More dollars for debt servicing means fewer for disposable spending.
This writing has been on the wall for years but, as usual, nobody wants to ruin a good story. Least of all mainstream media.
In my book, How much Bull can Investors Bear (published in early 2017) I wrote:
‘It would appear that global wage pressures [due to automation and globalisation] are going to continue pushing in on households in the developed world. Without rising incomes to finance greater levels of debt, economies (dependent on debt–funded consumption) are going to struggle for growth.
‘The next 5–10 years are shaping up to be particularly difficult — tax increases, welfare cutbacks, wage stagnation, higher unemployment or underemployment, asset prices undergoing a severe correction, rising social tensions, and an increase in political uncertainty.’
Let’s take a look at some of these factors.
The Sydney Morning Herald ran the story ‘Push to increase and expand GST’ on 16 October 2018.
Here’s an extract (emphasis is mine):
‘The federal government must consider raising the GST from 10 to 15 per cent, some of Australia’s top economists have warned, urging them to package a hike in the goods and services tax with an income tax cut that would alleviate pressure on the lowest income households.
‘A 15 per cent rate on a broadened range of items would have seen GST revenue double to $130 billion in 2017-18, according to 2015 modelling from the Parliamentary Budget Office…’
And then there was this in The West Australian on 16 October 2018 (emphasis is mine):
‘The report by Professor Patricia Apps [University of Sydney professor of public economics] which will be launched in Canberra on Wednesday, found federal government policies over the years have exacerbated such income inequality.
‘Between 2003-04 and 2015-16, the top earners have raked in $12,342 worth of tax cuts, while the lowest earners have claimed $1449.
‘“This outcome is attributed to successive increments in marginal tax rates at low to middle income levels and on second incomes, together with lower top taxes,” Prof Apps said.
‘The report has suggested a return to a simpler, more progressive tax system, which means tax rates rise as people’s income does.’
At present, calls for higher taxes are just ‘thought bubbles’ from academics and economists.
However, when the going gets tough, expect some of these proposed changes to gather traction.
The lack of wage growth continues to confound the commentators and the RBA.
This is an extract from an article published by Business Insider on 17 October 2018:
‘Despite stronger economic conditions, booming employment growth and a full percentage point decline in Australia’s unemployment rate to a six-year low, there’s not been much joy for Australian workers when it comes to pay growth in recent years.
‘No matter what indicator you look at, pay growth still remains well below the levels seen in prior decades.’
According to the article (emphasis is mine), the cure for stagnant wages could be:
‘… that unemployment needs to hit incredibly low levels in order to deliver even a modest increase in wage pressures. Australia isn’t close to that point yet, hinting wage growth is likely to remain weak for some time yet.’
And therein lies the problem…
Higher un- and underemployment
Stronger employment growth? Who says? The ABS?
The un- and underemployment data is a joke.
This is the definition of employment from the ABS site (emphasis is mine):
‘Paid employment includes persons who performed some work for wages or salary, in cash or in kind…
‘Self-employment includes persons who performed some work for profit or family gain, in cash or in kind…’
What’s the ABS definition of ‘some work’?
‘The notion of ‘some work’ is interpreted as work for at least one hour.’
Work at least one hour per week for cash or, wait for it, in kind — and you are qualified as employed.
Congratulations, you’re now officially a breadwinner — provided the baker accepts ‘in kind’ payment.
And it’s this flawed ABS data that policy makers use to guide our economy. Now you can start to see why we’re in the mess we’re in.
GIGO…Garbage In, Garbage Out.
What is a more accurate reflection of Australia’s un- and underemployment position?
Roy Morgan Research conduct their own monthly employment survey — using a process and definition that would pass the pub test.
According to Roy Morgan’s more accurate data (emphasis is mine):
‘…employment estimates show real unemployment of 11% in August  up 0.8% on a year ago with 1.48 million Australians now unemployed. A further 1.07 million Australians (8%) are now under-employed meaning a total of 2.55 million Australians (19% of the workforce) are either unemployed and looking for work or employed part-time and looking for more work (under-employed).’
Compare these more realistic numbers with the ABS’s flawed reading and the chances of us ever hitting incredibly low levels of unemployment are Buckley’s to none.
Asset prices undergoing a severe correction
That process is still in its infancy.
These are the early signs of much worse to come.
Stagnating wages and rising interest rates reduce people’s ability to take on substantially more debt.
A debt-funded growth machine without debt is like a coal-powered generator without coal; it shuts down.
When the economic machine starts to spit and splutter, watch for defaults to increase.
When that happens, asset markets are destined for a faceplant.
When I wrote my book, I thought the timeframe might be 5–10 years for the truth to be revealed. Now I think it’s going to be more like 2–3 years. Expect events to unfold quite quickly.
My advice is to reject the lies, embrace the truth and take action to protect your financial position.
Editor, The Gowdie Letter