The Recessions We Had To Have … But Didn’t

This weekend’s Markets and Money is about politics, rather than just economics. The fact that this makes it no different to any other Weekend DR is precisely our point. Politics and economics have fused. All around the world. And in a really bad way.

We have politically manipulated markets for goods and services. We have politically manipulated money. And politically manipulated information. But who do we blame for our troubles, like poverty, debt repayments and unemployment? The free market! Too much capitalism, too much freedom on the internet and, worst of all, too much profit.

Have Australians lost their common sense? Do they really see freedom as the ill and government as the remedy?

We’re not sure. But here are some examples of what government is getting away with right here in Australia:

In January 2012 according to research firm Roy Morgan:

  • Unemployment was 10.3% (up 1.7% since December 2011) – an estimated 1,278,000 Australians were unemployed and looking for work. This is Australia’s highest ever number of unemployed as reported by Roy Morgan and is also Australia’s highest unemployment rate for a decade – since January 2002 (10.9% – 1,075,000).
  • A further 7.5% of the workforce were working part-time looking for more work (underemployed) – 934,000 Australians.
  • In total a record 17.8% of the workforce, or 2.21 million Australians, were unemployed or underemployed.
  • The latest Roy Morgan unemployment estimate of 10.3% is now almost double the 5.2% currently quoted by the ABS for December 2011.

How can a research firm find double the level of unemployment to our government statisticians? Are our government figures really that manipulated?

On Tuesday, Money Morning editor Kris Sayce commented on how the government prevents us from buying and selling what we choose to:

Keeping Cheese In, And Rubbers Out

You only have to read the list of import and export restrictions to see the hoops Aussie firms have to jump through to stay on the right side of government red tape.

Want to export “cameras or imaging systems for use underwater”? Forget about it. Unless you’ve got a permit from Defence Department and the Department for Foreign Affairs & Trade.

What about butter, cheese or yoghurt? Make sure you’ve got a permit from the Department of Agriculture, Fisheries & Food (DAFF). Think of the turmoil if people started exporting butter without government say-so!

And if you’ve ever wondered why Australia doesn’t have a bigger presence in the “sausage casings” industry, maybe it’s because you need a meat permit from DAFF before you even think about flying the flag for Aussie sausage casings.

But it’s not just export regulations pinning down Aussie businesses. Be careful what you import too. You’ll be pleased to know the Aussie government restricts the import of “Erasers resembling food in scent or appearance”.

Australia is the last bastion in the fight against novelty erasers. (If you think we’re kidding, check out this link.)

Your editor’s favourite cheese isn’t available in Australia because of pasteurisation laws. We’ll never forgive the Federal Government for that.

And consider the RBA’s backdoor bailouts of Australian banks in 2008. $55 billion and we don’t know who got what when or how. That’s more than Kevin Rudd’s $42 billion stimulus package handed out secretly to companies now at the ire of public opinion. Speaking of stimulus, there was that insulation episode. It stimulated the funeral and building market without much backlash against government.

Ever since PM Paul Keating told voters about ‘the recession we had to have’, recessions became political footballs too. Political decisions even. Whether or not to attempt Keynesian stimulus is a political question, not an economic one. There is plenty of evidence that Keynesian stimulus does and doesn’t work. The same goes for austerity. But the do nothing approach is the ultimate no-no for politicians. God forbid GDP goes negative for two quarters – the technical definition of a recession.

Then there are of course some more recent examples. Like the Mineral Resources Rent Tax. And the Carbon Tax. At least we don’t have an emissions trading scheme like the Europeans yet. According to Alexander Jung at Der Spiegel, that scheme isn’t working. ‘The price for emissions certificates has plunged, a development that is actually making coal more attractive than renewable energy.’

It’s always good fun when misguided government policies fail miserably. Unless people die in the process.

Manipulation Leads to Misallocation

Because politicians care more about the impression their policies create, rather than their true effect, they tend to cause problems rather than solve them. That of course creates more problems for them to solve, which suits politicians just fine.

But all this builds up over time. And, after more than 20 years without a recession, the imbalances have had a lot of time to build up here in Australia.

Where might they be hiding?

Imbalance 1 – Superannuation

A demographic bulge of people invested in the share market and other investments to fund their retirement. What happens when these people start to selling to realise their gains? It will create overwhelming downward pressure on prices. Especially once people realise that being the first to sell will leave you better off.

Will an entire generation become disillusioned with the idea of investing because asset prices come under downward pressure? Will they turn to income generating investments rather than capital gains? If so, it might make sense to switch your portfolio over now.

Imbalance 2 – Aussie dollar highs

It’s all over the papers. Australia’s exporters are under pressure over an extremely high Aussie dollar. That’s not a problem in itself, as we explained yesterday. The issue is that this may not be reflective of economic reality. It may be a reaction to money printing overseas, rather than having anything to do with trade balances.

This also means it can reverse rapidly. As it did in 2008, when the Aussie dollar nearly halved. That kind of volatility is really bad for an economy. Exporters and importers are at the mercy of currency market mania, rather than currency markets being a reaction to trade flows.

Imbalance 3 – Property bubble

Usually a strong currency comes with better purchasing power. But, as any visitors to Australia will tell you, life here is expensive. In foreign currency and domestic. Our best guess for the cause of this is the property bubble. It pushes up all costs in an economy.

Pop up shops are a great example of the economy’s reaction to this. Unable to sustain enough sales to meet high rent, shops are popping up and closing down in a matter of weeks. It’s a clever strategy, but is it really efficient and what shoppers want?

When property prices correct, the cost of living could fall dramatically in Australia. But so will wealth in the process. Unless you’ve managed to sidestep the falling asset classes.

Imbalance 4 – The lack of brush fires

More than twenty years without a recession has left Australia’s corporate and personal budgets untested. Thinking in terms every Aussie can understand, this means a heck of a lot of tinder has built up on the forest floor. Without regular back burning, a bushfire can turn into a catastrophe.

Australia’s incredibly high level of private debt is the perfect indicator of complacency. It’s probably not a stretch to say that Australia’s whole national psyche will change if the country is routed with the culmination of twenty years’ worth of repressed recessions. The recessions we had to have, but didn’t, will come back with a vengeance.

Imbalance investing

One question you have to answer is how to position your wealth in anticipation of all these imbalances correcting. Some might like to take to the sidelines. Others will place bets on how the story plays out.

Both strategies will require quite some patience. Imbalances have a pesky habit of lasting longer than you think. Which makes your editor favour the kind of strategies that reward patience in the first place. The kind that see you reap measured and compounding gains regularly.

We are speaking at Port Phillip Publishing’s first ever investment symposium. And part of our speech will be about the investment strategy that does just as we mentioned above – reward patience. It would be great to see you there. So if you haven’t registered already, you can find out what all the hubbub is about here.

Until next week,

Nickolai Hubble.
Markets and Money Weekend Edition

About the author: having recently escaped from academia, Nick decided to drop his tights (the required attire of a trapeze artist) and joined Port Phillip Publishing. Instead of telling everyone about the Markets and Money, he now spends his time writing for the weekend edition.

ALSO THIS WEEK in Markets and Money

The Oil Price: Warning of War?
By Dan Denning

The Western world has been so safe, comfortable, and prosperous for most people in the last 20 years that it’s almost unimaginable we could be seriously inconvenienced. It’s even more unimaginable that Great Powers like China, the US, and Europe would permit a war to break out smack dab in the middle of the world’s largest oil reserves. But collective plunges into insanity and war happen pretty regularly in human history.

To the Tune of a Greek Bailout
By Nick Hubble

Instead of letting this failed system in Greece crumble, the power to compel is now being abused across borders in economic warfare. The Troika is looting productive Europeans to subsidise unproductive Greeks. It’s just a leech that’s swapped hosts. You’d think the Germans would know better than to attempt to control a nation suffering under crippling and irrational debts. It didn’t end well for the Germans when they were in that condition after World War I.

That Fair Dinkum Bloke Barack Obama
By Dan Denning

People sense the system they live in his corrupt and that if you play by the rules, you’re a sucker. The only people that seem to get ahead are the people that cheat or have connections or are already rich. That doesn’t seem fair either. And when people sense that playing by the rules doesn’t pay anymore, they’re more tempted to even things up by taking what’s not theirs.

Moneyball Investing: A Simple Way to Beat the Stock Market
By Chris Mayer

In markets, one of the best predictors of wealth creation is ownership by the people in charge. Hardly anyone focuses on ownership. Ask a CNBC talking head how much stock the CEO owns of his favourite play? He won’t know. Heck, ask most fund managers how much skin their management team has in the game. They won’t know either. They don’t look for it. And that is your opportunity.

Saving Money and Time
By Bill Bonner

“You know, I’ve been reading your Markets and Money for years. And the one lesson I take from it is that you have to have some savings…so you’re not forced to run on the treadmill all the time. You need some money and some time. Otherwise, you’re never going to figure out what is going on. And you’re not going to have a clue of how to make any money. You just go from day to day…from job to job…from one shop to the next mall…from bill to bill…

Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to