Welcome to Fantasy Land

Tax cuts. Return to surplus. Higher GDP growth. Paying down debt.

Wage growth resuming. No recession in sight.

Whatever hallucinogenic they’ve put in Canberra’s water supply, it sure is working.

The budget was an exercise in excessive hope prevailing over economic reality.

And just when you think things can’t get any more fanciful in Fantasy land, along comes Bill Shorten with promises of even more tax cuts.

Given the delusional mindset of our political class, there’s a strong case for them to undergo mandatory drug testing.

Back here on planet Earth, we need to look at reality.

Our country’s economic ‘success’ has been a direct result of our (now total) dependence upon debt.

Pure and simple.

In 1990, Australia’s total debt (household, corporate and government) was less than $1 trillion.

Today, it’s just shy of $7 trillion…a seven-fold increase. That’s not something we should be proud of…it’s an indulgence.

That extra $6 trillion debt load is what’s kept us recession-free for so long.

The circulation of those borrowed monies within the Aussie economy is what’s kept the GDP numbers in the positive.

For the best part of 30 years, we’ve been compounding our debt pile at an average annual rate of 7%.

You don’t need a PhD in maths to figure out the formula of our ‘success’. Next year we need to add another $490 billion ($7 trillion x 7%) to our debt pile, and the year after it needs to be a little more and so it goes on.

The size of our nation’s problems are compounding along with our debt.

Yet, those responsible for crystal balling our future, are either oblivious to, or are paid to, ignore the giant debt elephant sitting in every corner of our country.

Do they not read the papers in Fantasy Land?

‘Across Australia, more than 963,000 households are estimated to be now in mortgage stress (last month 956,000). This equates to 30.1% of owner occupied borrowing households. In addition, more than 21,600 of these are in severe stress, up 500 from last month.’

Macro Business 3 May 2018

‘One in every five Australian children has gone hungry in the past 12 months according to a new [Foodbank] report, with some even resorting to chewing paper to try to feel full…

He said mortgage stress and the cost of living were driving families to use foodbanks for the first time.’

ABC News 15 April 2018

And this stress is intensifying BEFORE interest rates have increased to any real extent.

The lack of wages growth and rising fixed costs (electricity, insurances, rates, government charges) is putting indebted households in a vice.

What sort of pain will there be when, or if, interest rates go up one percent?

Yet, according to this extract from the 2018 Budget papers …

‘Household consumption is forecast to grow by 2¾ per cent in 2017-18 and 2018-19 and by 3 per cent in 2019-20…It is expected to be supported by income growth from solid employment outcomes and strengthening wage growth…’

Seriously?

Strengthening wage growth…hmmm, heard that before.

The RBA produced the following chart showing wage growth forecasts since 2011 (the coloured lines) compared to what actually happened (the black line).

S&P 500 Index Chart. 18-04-2018


Source: RBA
[Click to enlarge]

Obviously, Treasury didn’t get a copy of the RBA’s memo on ‘serial overpromising and under delivering’.

A tightening labour market…really?

According to the latest Roy Morgan report — Unemployment and Under-employment Report — (a more accurate assessment than the mythical report produced by the Australian Bureau of Statistics) the total number of under and unemployed exceeds 19%. For some perspective, a decade ago the number was closer to 12%.

There’s more slack in the labour market than our bubble-bound Canberra bean counters are factoring into their pie-in-the-sky forecasts.

What about the other great wage suppressants?

Globalisation (outsourcing jobs to cheaper labour sources) and artificial intelligence.

These pressures are not going away any time soon.

However, if you’re employed in a non-competitive sector such as the public service and devoid of any contact with the real world, then I can see how you’d factor strong wage growth into your calculations. 

Hairy chested assumptions

GIGO — garbage in, garbage out.

The budget is only as accurate as its inputs.

These are the ‘hairy chested’ assumptions that our budget has been modelled on.

S&P 500 Index Chart. 18-04-2018


Source: Government Budget Papers 2018
[Click to enlarge]

Let’s take the first one…Real GDP rising to 3%.

The budget papers actually provide a chart on historical and forecast chart Real GDP…

S&P 500 Index Chart. 18-04-2018


Source: Government Budget Papers 2018
[Click to enlarge]

With the exception of a brief spike in 2011/12, we haven’t seen Real GDP growth of 3% for more than a decade.

Over the past decade, we’ve been on a debt binge that’s earned us the less than flattering title of ‘the world’s most indebted household sector’. If all that additional borrowing didn’t get us above 3%, then what’s it go take to get us there?

They really do live in Fantasy Land.

But we’ve been here before. This table is from the 2008 Budget Papers…

S&P 500 Index Chart. 18-04-2018


Source: Government Budget Papers 2018
[Click to enlarge]

Do the ‘hairy chested’ assumptions look familiar?

For a little context, you have to remember these (overly) optimistic forecasts were made in May 2008…after Bear Stearns collapsed; subprime loans were defaulting and the US housing market was falling and only months before Lehman Brothers collapsed.

Did any of the growing nervousness at that time ring an alarm bell with Treasury?

Nope.

My guess is the Treasury does its calculations backwards. They knew the answer their political masters want and play with the variables to achieve the pre-determined outcome.

Swanny wanted to announce a surplus (that never materialised), so they used numbers that bore no resemblance to reality.

Morrison needs a surplus to boost the Coalition’s re-election prospects, so he too gets a ‘beautiful set of numbers’.

The parameters of the 2018 Budget don’t factor in the potential for the proverbial hitting the fan — here or overseas — in the next year or two.

In all of history, there’s never, ever been a recession free run that continues indefinitely.

The further we move away from the last recession, the closer we are to the next one.

Stability leads to instability.

Even if we (as one of the most indebted countries in the world) miraculously avoid a recession, what about if the US or Europe hit the economic skids like they did in 2008/09?

Or worse still, China experiences a wave of debt defaults?

The next global downturn will be vastly different to the next one.

The world has far more debt.

Interest rates are already low.

China won’t be coming to the rescue.

And central banks will have lost their mojo.

On Monday, I’ll give you my budget forecasts.

They won’t win me any votes because we (as a nation), along with our those who inhabit the Canberra bubble, have been living in a Fantasy Land for far too long.

We actually believe we can continue living beyond our means indefinitely…which is why the next collapse is going to be a sobering and painful period of readjustment.

Regards,

Vern Gowdie,
Editor, The Gowdie Letter


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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