What Three Grumpy Old Men Think of an Australian Recession

And we’re back.

It was a long two weeks up on the Sunshine Coast. Doing nothing is tiring and it makes you sleepy. But, as you keep reading every time one of the editors comes back, being away is illuminating. You have to fly above the clouds to see what’s up ahead. In this case, it’s a brick wall.

But before we get to what’s in store for Australia, what’s been going on lately? Gold had its biggest jump in more than a year and at the close of US trade was just under the all-important 50 day moving average. That’s interesting because stocks and bonds were flat, so gold broke the mould. It also puts the record number of people shorting gold into a conundrum…

short positions
In order to escape a losing short trade, futures traders have to ‘buy back’ contracts, which adds to buying pressure. What’s called a short squeeze could be in the making for gold as more and more short positions are closed. That would make the gold price surge suddenly, much needed relief for gold miners and owners alike. Dan Denning is sifting through the Aussie listed gold sector now, so keep your eyes peeled for his analysis soon.

Gold is far from the mind of most Australians though. Especially those who aren’t worried about an economic downturn. Deloitte Access Economics forecaster Chris Richardson reckons Australia’s future is ‘not a beautiful picture, but it’s not a recession.’ The three grumpy old men at Perigian Springs all disagree. They meet every few weeks and put their heads together to discuss the same sorts of things you read here, and we joined them during our vacation. Between them, they represent Australia’s capital stock in terms of brains and money, so your editor decided to shut up and listen. In their opinion, Australia’s near future features a recession and it’s going to be a beaut.

It would take an economic crisis in China to trigger an Australian recession according to Richardson’s forecasts. He’s onto something there, as Greg Canavan will tell you over at Sound Money. Sound Investments. The mainstream media picked up the story years after Greg first began publishing his predictions about China. Unsustainable growth, ghost cities, debt, insolvencies, shadow banking…the list goes on.

But even without a struggling China, Australia might be headed for a recession. Mortgage fund GSI looks like it might go belly up soon, after default rates on its mortgages jumped. Bad loans could swamp the fund, so it froze the 3500 investors’ $154 million as a precaution.

It’s one of many similar institutions to struggle in recent times. Banksia was the highest profile one. Isn’t this how the housing crisis started in Europe and the US? Imagine if Banksia had ATMs and you saw lines like the ones outside British bank Northern Rock during the crisis. Now that would be a wakeup call.

Even without some sort of ‘crisis’, at the very least Australia is in trouble because it hasn’t been in trouble for so long — twenty-something recession-less years. We haven’t done an economic spring clean for decades. What happened to ‘recessions we have to have’?

Pink batts, school halls and $900 cheques, that’s what.

Here’s an idea. Rather than stimulating the Australian economy the next time China slows and Australian GDP falls, let’s subsidise flammable insulation in Chinese homes instead. That way Australians don’t have to die, the Chinese can build another house on top of the one that burns down, and they can use twice as much Australian iron ore to do it! The mining boom would be back with a vengeance and the politicians could still claim it.

Back to the three grumpy old men. They’re Australia’s future. Well, their capital is. It’s needed by entrepreneurs to create businesses. Real businesses that supply things people want, unlike flammable insulation and empty school halls. But, going by what the three grumpy old men had to say, their capital isn’t going anywhere fast. It’s waiting.

(It’s actually going overseas or into places that won’t create jobs.)

What’s the capital waiting for? Why won’t the grumpy old men invest in entrepreneurs who pay young ‘uns to monitor Facebook all day long? As an economist like Richards would say, what’s going wrong with Australia’s capital structure?

It’s all about the recession we have to have. It’s why the three old men are grumpy. The recession we have to have hasn’t happened yet. And it just keeps on not happening. Which means the opportunities that go with a crisis aren’t popping up. And there’s no way you can convince a grumpy old man to invest when he’s waiting for a crisis. All he wants to talk about is capital preservation.

Now, our bet is that there are other grumpy old men with capital reading this. They’ve decided to sit and wait for the crisis. With Australia’s regulations, cost of living and property prices setting global records, you can’t blame them. But the longer the recession in Australia takes to happen, the grumpier they get. Time isn’t on their side, so some of them decide to pack up and take their capital elsewhere. Others stick to defensive investments that don’t create jobs. But they’re all waiting for the recession we have to have.

Perhaps the best advice for the grumpy old men is to start a political movement which advocates periodic recessions. They could actually deliver on the promises politicians make — affordable housing, a lower cost of living, less pollution, stop the boats…

Heck, there’s still a chance the Australian cricket team could bring home the Ashes if we have a recession starting today. This chart from ANZ via the Eureka Report shows that a falling Aussie dollar gives our national cricket team a boost. Each time the Aussie dollar falls against the pound, our cricket team’s win/loss ratio improves.

Ashes Win-Loss Ratio and the AUD/GBP Exchange Rate

AUD GBP exchange rate
Source: ANZ and The Eureka Report
If anyone can explain this correlation, let us know at letters@marketsandmoney.com.au. It might have something to do with the cost of beer, as most things do. When British beer is affordable, the Aussies do poorly. When Australian beer is affordable, the English do poorly (despite its terrible taste).

So whether it’s cricket, beer, house prices or investing your capital, bring on the recession we have to have!


Nick Hubble+
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From the Archives…

Why There’ll Be More Fringe Benefits Tax-Like Bombs in the Future
19-07-13 – Greg Canavan

The End of The Economy Deformed by Easy Money
18-07-13 – Greg Canavan

A World Without Money?
17-07-13 ­– Bill Bonner

A Credible Threat to Gold?
16-07-13 – Greg Canavan

The Making of a Modern Debt Slave…
15-07-13 – Bill Bonner

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.

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