If you’re looking for reasons why the Aussie market surged yesterday, it wasn’t because of strong employment numbers. For the month of December, the Australian Bureau of Statistics (ABS) reports that the economy lost 31,600 full times jobs while adding just 9,000 part time jobs.
Throughout 2013 the economy lost 67,500 full timers and added 122,000 part time jobs – not the best mix for employment gains. The headline unemployment rate remained stable at 5.8%, with the deteriorating employment situation masked by a falling participation rate. That is, fewer people actively looking for work.
And don’t forget, if you manage to work at least 10 hours per week, the ABS considers you employed, despite the fact that 10 hours of most peoples’ labour won’t put a roof over their head or food in their belly.
In short, the numbers reflect a pretty weak jobs market for Australia. A slowing economy obviously impacted on full time jobs, while lower interest rates provided a big boost to part time employment. For some flimsy anecdotal evidence of why part time employment is so strong, everywhere we look in Melbourne, cafés are in a roaring bull market…
Think of 2013 as a turning point for jobs. This year, the situation is likely to deteriorate further. As mining investment and employment continue to decline, it’s highly unlikely that housing will pick up the slack. And surely we must be nearing peak capacity for coffee shops and real estate agents?
The Reserve Bank has fired most of its interest rate ammo. There is still a little stimulus left in the system from last year’s rate cuts, but that will run out by mid-way through the year. When an economy is hooked on easy money, as the Aussie economy is, it always requires more.
That’s because it’s structured for an easy money hit. Ever since the last recession way back in the mists of time, interest rates in Australia have fallen. There’ve been periods of rising rates, largely to offset rising national incomes coming from China’s easy money policy, but the trend to lower rates is unmistakable. We’ve gone from a peak of about 17% in the early 1990s to 2.5% today.
Much of that decline is because of falling inflation. But even accounting for inflation, real rates have fallen too. The ‘real’ cash rate is now approaching 0%, and was only lower during the GFC.
Zero real interest rates encourage speculation and discourage genuine, productivity enhancing investment. That’s why you see the property market going nuts on the back of sharply lower interest rates. And why ‘investors’ are taking on record amounts of debt to buy up residential property. In the year to November, investor finance commitments rose 35%!
Yes, low interest rates are ‘working’. Investors are driving house prices higher while first home buyers stay out of the market. Activity in other interest rate sensitive sectors is robust too. But if the RBA responds by tightening money, activity will slow sharply. Because with China set to enter a structural slowdown over the next few years, there’s nothing to take the place of easy money fuelled growth.
And China will grow much slower in the years to come. China’s wealthy know it too, which is why they are getting out of the country. According to Reuters,
‘Overall spending by wealthy Chinese fell by 15 percent in 2013, the third consecutive year of decline, according to a survey by the Hurun Report. Spending on gifts in particular also declined by a quarter.
‘The drop coincides with a government crackdown on corruption and gifting, as well as a growing penchant for travelling and shopping overseas to circumvent Chinese consumption taxes on luxury goods as high as 40 percent.
‘The shrinking ranks of wealthy residents in China has also reduced luxury spending. One in three so-called high net worth individuals have already left, or are planning to leave, the country, the report showed, mostly to seek better opportunities for their children’s education.‘
Hmmm. If 30% of wealthy residents are bailing, does that bode well for the future? Probably not. They’re either taking their ‘wealth by corruption’ before it’s confiscated, or they’re genuinely wealthy and don’t like where China’s headed.
Either way, it’s a reflection that wealth won’t be so easy to come by in China in the coming years.
In fact, it won’t be so easy anywhere. The ‘Great Reflation’ has just about run its course. We’ve just experienced five years of unprecedented monetary stimulus. Can we get five more years? Sure, but the central bankers will have to take things to another level if they want to get greater ‘results’.
That is, it requires ever greater amounts of monetary fuel to keep the fires of inflation going. If you stop, the flames die down. If you stop for long enough, they go out. It becomes cold, and deflation emerges.
We wrote about that yesterday, with IMF head Christine Lagarde warning about the threat of deflation. It looks like her words have gained some traction. Now we have another regional Fed chief (do these guys make speeches every other day?) warning of the dangers of inflation being too low.
In an interview with the Financial Times, Minneapolis Fed President Narayana Kocherlakota came up with these classics:
‘We’re running the risk of being content with inflation running consistently below our target. That’s inappropriate.‘
‘My point is simply we need to do more. If the committee chose to do that through more asset purchases that’d be fine with me. But we have to be doing more.‘
Our suggestion to Mr Kocherlakota, although probably not a popular one, would be to do less. Get out of the way. Let the market work it out. Move interest rates back to the point where the needs of savers and investors balance out. Leave the hard work of economic reform to elected officials, not to unelected academics.
We’d also suggest to him that monetary policy as a tool is a very blunt one, so he should stop bludgeoning the economy with it. It’s not a magic wand that can fix everything. And if things aren’t going the way your textbooks predict, it’s not because you have done too little.
In fact, you’ve all done too much. Talked too much, believed too much, and stimulated too much. At some point, the market will give you its opinion. And it won’t be complementary.
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