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The recession, economic stimulus and the stock market.

March 15th, 2009 · Greg Atkinson · 53 Comments

Often economists, journalists and politicians use so much jargon when talking about the current economic situation that is is hard to follow what they are actually trying to say. Economists for example cannot seem to agree on anything except that they are legends in their own minds, journalists try and fumble through economic discussions and politicians simply try and convince us they know what they are talking about. The simple fact is much of the time all three groups talk utter rubbish.

Let’s start off with a classic term that is used a lot these days “negative growth”, which makes as much sense as a term a colleague of mine once used – “not unimpossible”.  What economists are trying to say is the economy is in decline or that there is a “contraction” in terms of national gross domestic product (GDP). Everybody tends to get nervous about a contraction in the economy because it simply means things are going backwards; jobs are being lost, businesses are seeing sales decline, exports are down and for the government income from taxes is falling but welfare payments are up.

In economics if there are at least two quarters of GDP contraction then an economy is said to be in a recession, although a recession can be any period of reduced economic activity.  Economists and politicians like to play around with the term recession and thus we end up hearing variations such as technical recessions, mild recessions, severe recessions, deep recessions, shallow recessions and even depression like recessions. 

Often how a recession is described has little to do with hard data and more to do with such factors as; how much attention a journalist is seeking for his/her article (scary headlines in recessions work well), what side of politics a person is on and maximising media focus.  Economists making dire economic predictions tend to get more airtime during recessions for example.

If you want to scare the pants off people then you can use the phrase “a long, deep, severe, painful and depression like recession” whereas if a government if trying to convey to the people that it is effectively dealing with a recession it might use the term “mild recession” or they may even pretend that a recession does not exists and simply define it as a “recession like” downturn. Catchy terms are also very much in demand and the clowns at the IMF (International Monetary Fund) have dubbed the current economic mess “The Great Recession”.

Also prepare yourself for comments from the government like, “the recession would have been worse if we had not acted” or “it would have been worse if we did nothing” which is the same as boasting you wore a seat belt after you smashed into the rear of the car in front of you. The point is it would have been better if you did not crash in the first place and similarly, it is best to avoid recessions rather than have the government praise themselves over how well they are managing one.

The fact is that nobody actually knows what sort of recession the economy will have until it is all over. For months people argue about if there will be a recession or not, they then move in a phase of talking about how severe it will be and for how long it will last and then finally, they will start to talk about a recovery and how bad the recession was.

At present Australia is in the twilight zone where the Government appears unwilling to utter the word recession but many economists are openly talking about it. Mind you many of these economists are the same “experts” who in 2008 said Australian would avoid a recession. Enough said.

Now recessions are generally not good for governments. Business and consumer confidence plunges, unemployment rises and people start to look towards governments for solutions, and if a government has no response then they will see their chances of re-election dwindle.

Now I must stress at this point that a government seeks to find responses when faced by a recession but these are not always solutions. Rudd’s pre-Christmas cash handout for example was never going to prevent a recession, but it was a response and a popular one at that.

In other words the cash handout itself was not a solution in terms that it really solved any problems, but it did give the government some breathing space. As I mentioned in another blog this was a colossal waste of $10.4 billion dollars and just remember, that most of us will end up paying that money back sometime in the future.

So what can a government do when a recession is on the horizon?  Well for one thing it is not wise to talk down the economy and raise interest rates but that is what Rudd, Swan and the RBA did last year. (see “The Reserve Bank, rates cuts and a possible nasty turn“)

The wise course of action for any government is to try and maintain growth and make it easier for companies to keep on staff.  Lower interest rates, corporate tax breaks and even some well directed government spending can all help to support a nation’s domestic economy. This leads us then onto the subject of economic stimulus packages.

An economic stimulus package is where the government simply tries to spend itself out of trouble using our money or by borrowing money that we will have to pay back later. I have no problem with government’s trying to spend a little extra during a recession to help the economy as long as it is well planned, well directed and will deliver long term benefits to the nation.

In December last year in Actions to stimulate the economy in 2009 and beyond I mentioned some areas where the government could outlay funds during this recession that would benefit all Australian’s in many years to come , but sadly it seems most of Rudd’s $42 billion economic stimulus package is going elsewhere. 

As a result we, the taxpayers, will end up bearing the burden of a massive re-election spending programme that will not make Australia any more competitive in the future. Yes the extra money for hospitals is good, but this is simply a way to fund Rudd election promise to improve the hospital system and ultimately it will fail anyway.

As for government cash handouts, they are simply a waste of money and at best give us our own money back or quite often give our money to someone else. Much of the money given out via cash is banked or used to pay off personal debt which is quite a good thing for people to do, but it is a lousy way to stimulate the economy. Also people are not inclined to spend if you tell them they are in the middle of a national economic crisis so I question the logic of scaring people one day and then telling them to go out and shop the next.

A better use of the money for example would have been to increase pensions for seniors and care givers resident in Australia i.e. people who actually need the money even when the nation is not in recession. Also how about helping self funded retirees who have been hit hard by the stock market slump and/or have money locked up in managed property funds etc? I would suggest that if you follow where the government handouts are going you will see it was more related to electoral strategy than any well thought out economic planning.

So there is a lot happening with the Australian economy at the moment, exports are dropping, domestic demand is weakening, jobs are being lost and we have the government splashing around money in order to maintain economic growth (and get re-elected).  All this action is reflected in the movements of the stock market and as we all know the movement has been generally downwards since the highs way back in late 2007.

In good times the stock market trends upwards but when a nation’s economy faces tough times, the market adjusts downwards. At the moment the Australian stock market is essentially trending sideways and this suggests investors are not sure if the worst of the economic crisis is finally being worked out of the global financial system, or if we are about to see the global economy lurch further downwards.

It is important for investors to remember that the stock market generally moves down before the impact of a recession spills into the real economy (i.e. before people start losing their jobs and sales decline etc.) and we saw this in action last year, when the ASX All Ordinaries/ASX 200 were both in bear market territory well before most experts in Australian were talking about recession. 

Conversely the stock market should start to recover when the bad news stops, and this is likely to happen well before jobs are created and economic growth returns. (see also: What we need for a sustained stock market rally)

We do not know when the stock market will start the next long term trend upwards nor do we know when this global economic crisis will start to subside, all investors can do is look for signs of a recovery and hope to ride the next bull market upwards to at least cover the losses sustained during this current bear market.


53 responses so far ↓

  • 1 Jessica // May 7, 2009 at 10:09 pm

    I admint I’m poorly educated with polictics, economics or anything really that is no direct subject of teaching in school. I’ve heard from an ‘oldie’ that if everyone put their $900 into the stock market the recession will loosen up. Is this true at all? Should I go about making an appointment with a financial advisor to spend this money wisely as I’m not interested in spending it on luxeries if it won’t in the long term help ‘boost’ the economy

  • 2 Greg Atkinson // May 8, 2009 at 6:09 pm

    Jessica all I can say is what a person should do with the Government handout money will depend on their personal circumstances. Personally I see nothing wrong with putting the money into the bank (or paying down debt) while you read up on investing and take your time thinking about your next step.

    There are plenty of free online resources to help you learn more about investing. I have included some useful links here: http://www.shareswatch.com.au/finance_links.html and I think Investopedia is a good place to start. (just type in some investment phrases and off you go) Also the ASX website has some really good guides for new investors..all free. Also check out my investment tips as they might help you.

    Of course free to look around this site and ask questions.

    Hope this helps.

  • 3 Ned S // May 12, 2009 at 8:58 pm

    Just skimmed through the 2010 Oz budget effort. The word bludger seems to vanished from the national vocabularly. As in it is a case of pick your bludger category: Are you a Type A.1, A.2 etc, B.1.1, B.1.2 etc, C.1.1.1, C.1.1.2 etc, etc, etc …

    I’m amused. Particularly so because I read through a couple of MacFarlane’s Boyer lectures from late 2006 today I guess. And in light of of the fact Rudd and team are predicted about a million jobs to go or somesuch “if all sort of goes well” (that’s not a direct quote of course) … What hoot!!! A bit from one of MaFarlane’s chats follows:

    “Perhaps therefore it is fitting that former British Prime Minister, Jim Callaghan, be given the last word to sum up what he had learned from the economic turbulence of the 1970s. Callaghan said, and I will quote:

    What is the cause of high unemployment? Quite simply, and unequivocally, it is caused by paying ourselves more than the value of what we produce. There are no scapegoats. That is as true in a mixed economy under a Labour government as it is under capitalism or communism. It is an absolute fact of life, which no government, be it left or right, can alter. We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government spending. I tell you in all candour, that that option no longer exists, and that insofar as it ever did exist, it only worked on each occasion since the war, by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step. Higher inflation, followed by higher unemployment; we have just escaped from the highest rate of inflation this century has known; we have not yet escaped from the consequences, high unemployment. That is the history of the last 20 years.”

    Ah how quickly we truly do forget – MacFarlane was telling them this stuff only 2.5 years ago. I’ve really got to think about leaving this country. I’m absolutely convinced I’m a total misfit. Smile!

  • 4 Pete // May 12, 2009 at 10:25 pm

    Thanks for that post Ned

    I’m with you on the leaving the country thing (one day?), but because the Gov is screwing it up completely, not because i’m different 🙂

  • 5 Greg Atkinson // May 13, 2009 at 11:05 am

    Well I am already out of the country and I think I might stay out for a while.

  • 6 Ned S // May 13, 2009 at 1:21 pm

    I just get miffed because every year it is the same old nonsense – How can we micromanage the economy – How can we stay popular – fiddle, fiddle, fiddle.

    With the result that anyone who is awake has to start thinking (yet again) in terms of how can I cash in on the good bits and dodge the bullets.

    Sure, I appreciate they need to regulate the banks, prevent businesses out and out cooking the books, collect enough tax to provide some basic services and welfare type safety nets plus reward the oldies for “a job well done” and maybe even inject a bit of stimulus or cool things down occasionally.

    But responding to all the fiddling wastes so much time and effort and money that could be spent doing something much more basic like earning real productive income that we pay tax on.

    Superannuation is a classic example – Lots of people think of it as an investment – Not true – It is a of means of locking people’s money up for years so that the government can avoid paying them a pension in retirement if at all possible – for which they get some tax advantage.

    But for 1) it is patronising in that it just automatically assumes all Australians are too stupid to save for their own retirement and for 2) it splits people’s asset pool that they could be using to build wealth into two pools (which can limit their investment options a lot) and for 3) it creates an entire industry that really shouldn’t even need to exist and can’t help but be inefficient because it is effectively government sponsored.

    And no, I’m not bitter and twisted because I lost a bunch of money in super recently – I didn’t. And no, I’m not bitter and twisted because the recent budget changed some rule or other I was hoping to cash in on – It didn’t.

    I’m just pointing out some facts. And every year it is fiddle, fiddle, fiddle with the whole silly arrangement as well. As if it isn’t all inefficient enough.

    Calm down Ned; Butterflies will do what butterflies do, and pigs will do what pigs do and politicians will do what politicians do.

    Hmmm … Back to trying to earn some money.

  • 7 Greg Atkinson // May 13, 2009 at 5:17 pm

    Ned S – I really dislike the budget process no matter who is in power. The concept of taking money from people and then using this to buy favour in certain electorates or voter groups seems pretty obscene to me. I would much prefer to see the government live within it’s means and taxes stay fairly stable.

    How can anyone plan anything these days when taxes, rebates and pensions entitlements keep changing? The more the government gets involved the more complicated things get for the average punter.

  • 8 Ned S // May 13, 2009 at 9:26 pm

    Greg – I’m “apolitical” when it comes to Oz – I believe there is no fundamendatal difference between what the two major parties that might govern will actually do, redardless of what they might say they’ll do (pretty much.)

    And I certainly accept government has to collect a certain amount of tax for all sorts of reasons. And if they aren’t taking them from me, they’ll be taking them from someone else. So I’m quite accepting of the fact I have to pay my bit for the privilegde (and it is) of living in an affluent, well ordered, quite civilized society with some fairly good services and welfare support systems in place with very minimal corruption.

    And I know that things in general are very much outside Oz’s control – If Japan and China and Europe and the US go up, so will we. To the extent that they go down, so will we.

    But the last budget worried me for two reasons:

    1) Rudd still won’t break that bit of news to Australians – The man has no spine – He is weak – He blames the rest of the world for dragging Oz down (while saying saying he take’s “Full responsibity” for this “very tough” – As in this “Yo Ho Ho type Santa Claus” type budget) – Without ever acknowledging the only reason we were up, IS the rest of the world. And says let’s keep all the children happy as much of the time as possible for as long as possible – By running a big deficit that will go on for a very long time – At least until he and his know they’ll be long gone.

    2) It indicates what Rudd thinks of Australians as a mob – He thinks we are weak – And can only cope with weak leadership that will pander to them. The corncern is that he very well may be correct – That bit is the TRULY HUGE WORRY. Because if he is right, we are in a lot of trouble mid to long term.

    So now is an ideal opportunity to start changing our national attitude. But nope, Kev has no guts and is going to let “the world” do the dirty work for him – If it should actually have to be done.

    I’ve got some disappointing news for Kev – History does not remember mamby, pamby little milksops in times of crisis as leaders to be emulated. It remembers and values the likes of Churchill and Stalin and Mahatma Ghandi.

    Some of those chaps might have been fundamentally nicer people than others judged by today’s values and perspectives. But irrespective, none of them were whimps. And if ever I’ve seen a bloke fail the whimp test in spades it was Kev yesterday. Pathetic.

    But hey, a weak leader can be voted out – But the thing that really worries me most is that this weakness may have gotten into the national pysche. That’s a way, way deeper problem.

    But I worry too much … This stuff is all going to take many years and even many decades to unfold. (Slighty glum Smile!)

  • 9 Greg Atkinson // May 13, 2009 at 9:48 pm

    Ned S – I agree that governments need to collect taxes of course, it is the way our money is spent that worries me.

    I lost all respect for Rudd when I heard how he bullies his staff (including those on the VIP jet). People in power who bully their subordinates are wimps with a capital W.

  • 10 Ned S // May 14, 2009 at 9:52 am

    The full title of Macfarlane’s 2006 series of 6 chats is “2006 Boyer Lectures – The Search for Stability”

    That “Search for Stability” bit is pretty telling.

    If anyone has not read the final lecture at least in the series of 6, I can only recommend it.

    http://www.abc.net.au/rn/boyerlectures/stories/2006/1769929.htm

    It must be read in it’s full context to truly be appreciated of course. But irrespective, I’ll quote a few bits to give a bit of an overview, while fully recognising that in doing so, I run the risk of losing some of the context and even corrupting some of it to a degree – But read the full article and you will get the full story:

    ” … the short-run incentives to governments are the opposite of the long-run needs for economic stability. At times, such as in the 1970s in the United Kingdom, people seriously questioned whether the combination of democratic institutions and economic stability was achievable.”

    “The evolution of demand management policies, particularly monetary policy over the past 30 years, has largely been an exercise in overcoming this conflict between short-term incentives and a long-term stability.”

    “And there are the traditional risks of inflation and recession. I am not so optimistic as to think that these threats have been completely overcome or that the business cycle is dead. Monetary policy will still have to grapple with these challenges and there will be pain and political controversy from time to time.
    No conceivable monetary policy can completely avoid these age-old problems. But the current framework for monetary policy is the best we have found to handle these challenges.”

    “So the central question is whether booms and busts in asset markets are more likely to occur in the future. No-one knows the answer to this, but there is no reason to believe that they will become less frequent, or smaller. We know that since financial markets have been deregulated, we have seen some quite pronounced asset price booms and busts, the most notable being the Japanese bubble of the 1980s and the high tech share market bubble in the United States and Europe in the late 1990s. Both of these were followed by recessions. In our own case, as I have outlined in earlier lectures, we had an equity and property boom and bust in the late 1980s, and a house price boom during the past decade that had many of the characteristics of a bubble, but fortunately it was not followed by a bust.
    If it is likely that asset price booms and busts will be at least as common as during the past two decades, and that their effect on the economy will be larger, what can monetary policy do about it?”

    “So if low inflation does not provide any insurance, what should a central bank do if it suspects that a potentially unsustainable asset price boom is in the process of forming, particularly when the boom is being financed by debt?”

    ” … I will offer a few simple thoughts that explain why central banks have had difficulty finding the solution to this problem.”

    “… monetary policy is a very blunt instrument. When interest rates are raised to address an asset price boom in one sector, for example, house prices, the whole economy is affected. If confidence is especially high in the booming sector, it may at first not be much affected by the higher interest rates, but the rest of the economy may be.”

    “While it is difficult to form a precise judgment about what the trend rate of growth of credit should be, the combination of fast credit growth and sharply rising asset prices should tell us something. At the very least, it should indicate that the prevailing interest rates is not viewed by borrowers as being high, or at least not high enough to deter them from using credit for speculative purposes.”

    “No-one though, has a clear mandate at the moment to deal with the threat of major financial instability associated with an asset price boom and bust.
    Yet I cannot help but feel that the threat from that source is greater than the threat from inflation, deflation, the balance of payments and the other familiar economic variables that we have confronted in the past.”

    Ned S again – The Rudd government is obviously very concerned about the prospect of losing a million or so jobs. But what makes it even more concerned, one has to suspect, is the degree of debt those soon to be newly unemployed million odd people are carrying.

    Reading Macfarlane’s lecture, I personally got the impression, that while he might have felt he had a very limited armoury to deal with a problem he felt could be coming, he sure would have liked to have had a crack at it anyway … But simply had no mandate to do so. (And this was written in 2006 and the problem/s is/are here. And nothing much has changed re the RBA mandate I know of?)

    But the politicians are on the job – Which would seem to take us back to the start of Macfarlane’s lecture I suspect?

    I’d be real interested to know what Macfarlane is invested/investing in just now – Even if I did have to pay a bit for the information – But unfortunately he doesn’t seem to be giving out public investment advice at this time. Smile!

  • 11 Roger // May 14, 2009 at 9:56 am

    Yea I just love my taxes going to help the couple down the road sit and watch T.V. all day. They voted labor and hated Howard because of such terrible things like work for the dole. Imagine suggesting people should work for money. After their baby arrived they got a new big screen TV so I guess the baby bonus was spent well.

  • 12 Greg Atkinson // May 14, 2009 at 8:40 pm

    Ned S – thanks for the link. That was an interesting read. It seems to me that not only are we likely to see further booms and busts but they are likely to be more severe. We just have too much riding these days on short term performance…..who really plans for the long term any more? I mean really plan as apart from just making empty long term promises.

  • 13 Ned S // May 15, 2009 at 9:16 am

    Greg – I think the West’s business model is flawed – As in a debt based spend more than you earn consumer based boom/mal-investment type business model just seems to be begging for a bust at the other end of it to me.

    And I reckon China has to be looking at the West’s business model and saying perhaps we can learn something from this – Like how to avoid it’s flaws. Plus saying Yes, we are very glad we are not a short term democracy.

    But it would appear this is the only model the West knows – Certainly it is the model they have run for to bail themselves out this time – They are going to borrow money (print it too) – And spend/consume (and don’t care if it is mal-investment) – Because they sure don’t want that bust.

    Might they actually get another boom or two out out of it? I suppose we should certainly all be hoping they do. Because the West is in such a deep hole and has such high expectations that any quick fix will really hurt.

    Should we trust any such booms? Not very much I think. Leastways not until they let capitalism do its nasty work and restructure their economies. And the West decides to live within its means. All of which seems to a way off happening yet.

    America actually still seems to be pretty much in denial? As in we’ve been nice, we’ve been good, and we are clever and hard working and strong – How could anything nasty happen to us? Well pretty easily if one thinks about it – Just live beyond your means for a few decades. (Same goes for Oz.)

  • 14 Ned S // May 16, 2009 at 7:42 pm

    It takes a bit to make me laugh at the moment – But this one worked:

    When the money comes out of the ATM, scream “I Won! I Won! 3rd time this week!”

  • 15 Greg Atkinson // Jul 8, 2009 at 11:56 am

    Ned S – sorry for the delayed laugh 😉 I have been trying to catch up with my reading and have been a bit slack on the blog replies.

    I think you are spot on about American being in denial. I believe that over the long term Americans are going to have to deal with the fact that they have simply been spending too much.

    In the years ahead I think we will see major spending cuts in the U.S and I am guessing that some overseas military bases will be closed. If the DPJ come to power in Japan for example then I would expect them to try and pressure the U.S to reduce it’s military presence in the country which is pretty unpopular especially in Okinawa.

    Anyway the U.S. have had their time in the sun, time to let someone else have a go. I know people get excited about China but I would also not rule out a stronger EU emerging from this mess.

  • 16 Ned S // Jul 8, 2009 at 4:28 pm

    It can be very difficult to relate to the American mindset on some issues Greg. A kind assessment may be that they don’t seem to gotten their heads around the concept of being team players perhaps? Smile!

    Often I’m sure that they believe their own claptrap. Although even when they don’t, I suppose they can justify their actions on the basis of their own certain knowledge that their way is the best way and what is good for America must ultimately be good for the world because they are such wise and benevolent souls – Or some such?

    On a related but more practical matter, it occurred to me that lots of American products are image based. People in developing countries buy Pepsi softdrink and Zippo cigarette lighters and eat in McDonald’s restuarants not because the crud is any better than a home grown equivalent of the same crud, but because of the association with the American images of power and freedom and liesure and wealth. America stands to lose a real lot if anything (like the GFC’s impact on them???) should take some of the gloss off that image. They have got LOTS of skin in this game!

  • 17 Ned S // Sep 13, 2009 at 10:57 pm

    Just read an interesting article – The basic thought was that “the trust is gone”. And that stimulus of the types we are seeing won’t bring it back. Rather, it contended that what is needed is all the things that aren’t being done – Things like transparency, mark to market, regulation and prosecutions.

    It basically reckoned Bernanke and co are fighting the wrong battle – It’s not a problem of liquidity as such, but one of trust now.

    I can sure imagine that there are huge numbers of hair trigger fingers just waithing to be pulled simultaneously at the sign of a downward correction. And Obama seems to have moved on with his major concern being health care reform – Not much focus there on changing any of the financial fundamentals.

    Are we seeing the beginning of a genuine bull market based on a new era of global prosperity? It seems pretty hard to trust it doesn’t it when none of the policy makers do as indicated by the facts that they remain committed to ongoing stimulus and just don’t seem keen on any sort of transparency.

    Really about all that makes me consider investing in anything is the propensity for inflation to become quite high. Which isn’t a healthy reason for investing – The fact that about the only things I do still trust in are the committment of policy makers to cause inflation; With an expectation that bubbles and busts will continue.

    Our policy makers have got some pretty deep and fundamental problems if there are many others thinking like me I suspect? And I’m starting to suspect they are unable or unwilling to address such deeper problems.

  • 18 Ralph // Sep 14, 2009 at 9:50 am

    I think you’re right, Ned. The financial system is so rotten at its core that policy makers are too frighted to get in there and inspect the foundations to see how bad it is. Or if they’ve expected, they’ve just resorted to hoping and fraying that it doesn’t collapse under its own weight.

    I think there is no desire to deal with the fundamental problems – it will involve too much pain, both personally and politically. It’s just all too hard.

  • 19 Ned S // Sep 22, 2009 at 9:45 pm

    Shiller’s S&P 500 P/E chart all the way back to 1880 ??? (plus other charts): http://www.multpl.com/

    Big long term macroeconomic trends. One thing that would seem obvious is that while prior to the 1990s, P/Es above 20 were unusual, since then it has been P/Es below 20 that are exceptional.

  • 20 Pete // Sep 22, 2009 at 10:56 pm

    Cheers for the link Ned, it is quite interesting

  • 21 Greg Atkinson // Sep 23, 2009 at 7:36 am

    Ned thanks for the link. When I look at these type of charts I am sometimes not sure what they tell me. For example since the nature of stock ownership has changed so much over time then it is hard to work if we should be worried about a P/E over 20 or not. Certainly some of the peaks before the major falls are pretty obvious when looking at the historical P/E chart but then again, bubbles are always easy to spot in hindsight 🙂

  • 22 Ned S // Sep 23, 2009 at 9:33 am

    Looking at the more recent data Greg (1990 onwards) I’d say P/Es of 20 (by Shiller’s method of calculating them) haven’t been a particular cause for concern at all.

  • 23 Ned S // Sep 23, 2009 at 9:49 am

    On another note, I think you’ll relate to the statement in blue that forms the bottom portion of this article:

    http://www.kitco.com/ind/nadler/sep222009.html

  • 24 Greg Atkinson // Sep 23, 2009 at 10:03 am

    Hi Ned – thanks, that pretty sums up my view on gold. I dare you to post that link on DR 🙂

  • 25 Ned S // Sep 23, 2009 at 10:23 am

    I already have mate – I must have a bit too much of the “fools go where angels fear to tread” thing in me?

  • 26 Greg Atkinson // Sep 23, 2009 at 10:52 am

    You are a braver man than I am Ned! But seriously I do think gold is ready for a big fall as I have been saying for a while. In AUD terms it has done basically nothing but fall this year but people still seem hooked on it.

  • 27 Ned S // Sep 23, 2009 at 11:34 am

    I guess for all the possible pros and cons I just feel it is overvalued right now for a bloke who doesn’t really want to own gold except a bit to pay his rates bill should very strange things happen. Talking about strange things, Brisbane is getting that dust storm too – I initially thought it was fog!

  • 28 Anon // Sep 23, 2009 at 11:46 am

    “Shiller’s S&P 500 P/E chart all the way back to 1880 ??? (plus other charts).”

    Thanks Ned. I’ve bookmarked that site.

  • 29 Pete // Sep 23, 2009 at 1:11 pm

    Ned S:
    That quote your posted on post #3 is excellent by the way.

    I still favour gold but do suspect that it will fall in price once deflation hits. To me that would present an excellent buying opportunity as the step after deflation may be particularly nasty – inflation.

    Incidentally both deflation and inflation are bad for debt. This relates to lending to businesses (business loans and leveraged assets), governments (bonds, government borrowing) and to the people (mortgages, personal loans, credit cards).

  • 30 Pete // Sep 23, 2009 at 1:22 pm

    Incidentally did anyone see a program on ABC or SBS last night (can’t remember which) about Iceland and their banking fallout?

    Very interesting stuff.

    Basically Icelands big bank grew to a size much larger than all of Icelands GDP. And it was a bit of a Ponzi. And it imploded with all its debt.

    Britain expects the Icelandic Government to pay them back 6 billion pounds (or some figure) due to losses, and this apparently equates to something like $60K for every man, woman and child in Iceland.

    Suffice to say, the Icelandic public are quite upset about this and some type of revolt seems likely in the future.

    And from this article by Nouriel Roubini:
    http://www.theglobeandmail.com/news/opinions/desperately-seeking-an-exit-strategy/article1288905/

    “Smaller economies – like some in Europe – that have large deficits, growing public debt and banks that are too big to fail and too big to be saved may need fiscal adjustment sooner to avoid failed auctions, rating downgrades and risk of a public-finance crisis.”

    We’re not in Europe, but I think we meet all of the other criteria – except for maybe the ‘too big to be saved’ bit. We are not in Europe and therefore we can print money (small Euro countries can’t print Euro), although if we have to do that Australia will become a very interesting place to live and work.

  • 31 Ned S // Sep 23, 2009 at 2:54 pm

    As I commented on DR today Pete, I imagine it is possible some countries will see deflation while others see inflation. As well as individual countries going from one to another.

    American (and UK) dependance on financials to earn a living is a concern. As is the reliance the US has on the fact the USD has been and remains the global reserve currency. However I can’t see the likes of China (or any other country) intentionally pulling the rug out from under US Treasuries. Although I never did figure out who pulled 550 billion out of the US money markets last year!

    All countries are linked in that they want some semblance of stability while they rejuggle their positions. Over a decade or so I’d guess.

    With one possible issue for the West being that while they are prepared to go into debt now, it is going to get more difficult over time – As Greg has pointed out, Japan has gotten by OK with some deflation. It may even be it has suited them well enough after the boom and/or with their aging population – Greg?

    It is one of the things I found interesting about Shiller’s graphs – They give an indication of some long term trends of what the US will do if it can, depending on what economic policies prevail at the time perhaps. With the latest I’ve read on any real attempts to regulate financials being timed for the end of 2010 – The US prefers them profitable as opposed to honest just now I guess.

    Oz printing money? Which pushes gold up in AUD. I just can’t get my head around what we’d hope to gain by printing money – Get our ER down? Seems just too desperate for small fry like us. Not to say gold in AUD can’t go up – A lot. But more because of another systemic shock I’d think? Or major conflict in the Middle East maybe? But such risks seem to be contained for now. With a lot of the fear factor having been contained as well with an expectation that world governments will act in some sort of co-ordinated fashion.

  • 32 Ned S // Sep 23, 2009 at 4:05 pm

    The other thing I see happening is Oz being OK because of Asia. Medium term anyway. And slowly becoming more socialist. Which pushes our problems further down the track. I probably object to it a lot more than most though. Because I’ve spent so much of the last 12 years out of the country. I’d rather have a bit less government “guarentee” (and lower tax) and a bit more freedom and choice. But I get the general impression most Aussies don’t seem to think that way anymore. And as our population grows and ages, freedom and choice are going to go by the wayside more and more – Regardless of what my preference might be. Smile!

  • 33 Greg Atkinson // Sep 23, 2009 at 4:31 pm

    Ned I tend to see things somewhat like you do. I guess when you live away from Australia for a while you see the changes more when you come back.

    What worries me is the nation seems to be getting mentally lazy and many people seem to think all will be okay because we have hitched our wagon to China. But as I pointed out in my blog about the Gorgon Project, a lot of the money from our resources flows straight offshore and in many cases Australian companies don’t even have a major stake in these ventures.

    In Japan for example they realise they will have to work smarter to stay competitive. They are focused on innovation, doing more with less and using technology to gain a competitive advantage. Sadly I just don’t see that much attention on these areas in Australia.

  • 34 Ned S // Sep 23, 2009 at 6:30 pm

    I agree with all you say above Greg – Including the fact we seem to be becoming lazy and dumbing ourselves down. Not that you said it that bluntly – Smile!

    But then Oz doesn’t need any expat to approve of it of course.

    Still, the real hub of the matter would seem to be that here, we have country that has just gone through 15 years of unbroken growth and very well may survive a deep global recession comparatively unscathed (because it IS the MOST blessed and fortunate of joints – As opposed to hardworking or clever!) and at the end be worse off than I remember from 15 years ago …

    In debt as a nation. In debt as individuals. Can’t afford to buy a dwelling anymore. Having more and more of our kids raised in single parent families – Lots of them on welfare. Wondering where we are going to get money for pensions. A crumbling healthcare system. I’ll stop there – You know the storey.

    If that was growth, then maybe we should try recession because we have definitely done something very wrong?

  • 35 Senator13 // Sep 23, 2009 at 8:09 pm

    That is an interesting point Ned. A bit of tough love might be just what we need. Something to force us to be more innovative and increase efficiency and productivity. There is always talk of Howard squandering the boom years – could Rudd have squadded the GFC years?? It would have been the best opportunity to push through some real reforms because I would have thought that the public would have been receptive to them and Rudd is way ahead in the polls and can afford to push through anything that could be unpleasant.

  • 36 Ned S // Sep 24, 2009 at 6:14 am

    Oz had about 725,000 people on the disability pension in 2007. That number is way too high to be justifiable I think. So it would seem that even during a boom, many more people get themselves on welfare – Because the money is there and they can I guess? With Ken Henry now having a good hard think about how he might be able to get a few of them back to work. Plus some others who’ve got themselves on other forms of welfare.

    I doubt he’ll have much success?

  • 37 Greg Atkinson // Sep 24, 2009 at 3:08 pm

    Ned I had no idea there were so many people on a disability pension. I am guessing anyone on a full pension and not working does not show up in the official unemployment statistic right?

    I don’t think Ken Henry will have much success bring down those numbers.

  • 38 Pete // Sep 24, 2009 at 4:07 pm

    Ned:
    Post #31:

    I just can’t get my head around what we’d hope to gain by printing money – Get our ER down? Seems just too desperate for small fry like us.

    If our banks go to the wall – what will the Gov do?

    They won’t be able to borrow that much money, because rates would skyrocket (think of the risk) and no-one would lend with that much risk, except maybe China but I think they have more to gain by letting us suffer (because we’ll get desperate).

    The Gov has guaranteed the banks money as it stands anyway – therefore it has to pay everything. Including money for international banks.

    So the way I see it, the Gov has committed itself to supporting the banks, which means supporting the property bubble and giving out stimulus. Which costs a lot of money, all of which it is borrowing (you can’t tax people more if you want to encourage growth and push down unemployment!).

    And if the Gov continues to do this (which it looks like it has to) for the next few years, then unless we have some sort of miraculous resources demand boom, we will be in debt…of at least 50% of GDP (in my opinion) and possibly much more.

    And more debt = more risk = higher rates = harder to repay debt = (cycle starts again) = default or money printing.

    And default is not an option.

  • 39 Senator13 // Sep 24, 2009 at 4:48 pm

    Wow Ned that is a staggering number. I agree with you – surly that number is too high to be justifiable. What would be worse would be the number that are on unemployment benefits that should not be.

  • 40 Ned S // Sep 24, 2009 at 6:22 pm

    It would be considerably higher now I’d guess Greg – I only picked up on it because the 2007 figure was given in a recent article where the concern was that it will go up as unemployment increases:

    http://news.smh.com.au/breaking-news-national/disability-pensioner-numbers-will-rise-20090401-9jlf.html

    Don’t know why a more recent figure wasn’t given? But either way, apparently 200,000 people dropped out of the workforce in the last recession never to return. So the concern is that will happen again.

    Yes, a criticism of the disability pension is that it masks the true unemployment statistic. A lot one might suspect with the most recent unemployment figure being a touch under 670,000.

    That fact the number on the disability pension is that high, also helps explain Ken Henry’s empathsis on “capacity building” – He is keen to get people off welfare and working of course. But like any wise businessman, he also realises it is easier to retain your existing “clients” than get new ones – So the retirement age was increased.

    I also found the following interesting:

    http://www.acoss.org.au/News.aspx?displayID=99&articleID=5858

    (Sole parents were miffed because everyone else’s pension went up in the last budget but theirs didn’t.)

    Out of interest I went to the Centrelink home page and had a snoop around payments. Apart from saying it seems real complex, I’ll keep my general opinions to myself! The following was interesting though:

    “Please note: As of July 1 2009, changes to the definition of income mean that your assessable income for Centrelink and the Family Assistance Office will also include:

    * reportable superannuation contributions, and
    * total net losses from rental property or investment income.”

    http://www.centrelink.gov.au/internet/internet.nsf/payments/ftb_a_iat.htm

  • 41 Greg Atkinson // Sep 24, 2009 at 7:05 pm

    Ned thanks for the links. This is all part of the smoke and mirrors routine that goes when governments massage the data. People under training also don’t get counted as unemployed so as soon as a recession looms there is a sudden rush to get people “trained”. Of course nobody bothers to really see that they are trained for jobs where the demand is or is expected to me in the future.

    It’s also good to see that Centrelink and our bureaucrats have made the social security system so complex that this will drive more people towards accountants at tax time. That’s just what we need, more paper shuffling 🙂

  • 42 Ned S // Sep 24, 2009 at 7:48 pm

    Pete – Our banks going broke? Low risk at this time I think. Although I certainly couldn’t talk authoratively on it.

    As to taxing us more, I firmly believe that is a given – Just a matter of how and when.

  • 43 Anon // Sep 24, 2009 at 7:57 pm

    I stress tested our banks with 10% (similar to 90’s default rates) and 20% default rates across their loan books – taking into account firesales and mortgage insurance etc. Suffice to say in either situation they will be in big trouble but they will survive.

  • 44 Pete // Sep 24, 2009 at 8:47 pm

    Anon and Ned:

    *My understanding*

    Currently our Gov and banks enjoy nice low interest rates from overseas lenders, due to:

    1) the fact that our economy, particularly our house bubble, has not suffered (yet?)

    2) the Government guarantee of the banks money (including international banks)

    What happens if our banks get stressed due to loan defaults, mortgage defaults, etc? Lenders will get concerned about increased risk and will raise rates.

    What happens when rates are raised? More loans are pushed to the edge. This creates more risk for lenders who will raise rates.

    So, what can the Gov/RBA do?
    – reduce the cash rate.
    This can increase inflation (although that’s another story) which would concern lenders. Also they only have 3% left to go, which is not so much. Reducing rates to 0% would reduce the value of the AUD, making overseas loans proportionately more expensive.

    – increase the cash rate.
    They won’t do this, because then the RBA could solely be blamed for increasing mortgage rates in a time of crisis. It just won’t happen. Plus it adds risk, and international rates would probably rise too, although so would the AUD (probably) and may counteract international rates a bit.

    – borrow money.
    I went over this in my last post.

    – print money.
    I went over this in my last post.

    Damned if they do, damned if they don’t.

    Banks are on a knife edge. They are extremely vulnerable to increases in international interest rates and moves in the AUD. At the moment they are pretending that all is well and trying to absorb new costs as best possible. It just happens that they only have a certain capacity for this. And that is where the Government comes in to bail them out.

    Now there are four of them (and countless smaller financials that could possibly be bailed out, who knows what Kev would do) controlling most of the mortgages and a large number of loans.

    To understand the effect this could have, consider that Australia has just under $1 trillion (AUD) of mortgage debt. Can the Government just borrow $100-$200 Billion here and there to bail out the banks? Whilst racking up its own debt at the rate of more than $50B a year? What if it needs even more money to bail out the banks because other loans default?

    I see this as a precarious balancing act in which the RBA is essentially hog-tied and the Government just has its fingers crossed that the banks don’t need to be bailed out (probably due to property market bust).

  • 45 Senator13 // Sep 24, 2009 at 8:48 pm

    I would think that the banks have a bit of wriggle room. They can up their fees, up their rates, up their standards of who they lend to. They are going to be pretty cautious for the next little while I would think and if their recent reports are anything to go by hopefully there are no more nasty surprises. I think they are trying to hold out until things start to ease and get back to “normal” and hope that by then things are back on track.

  • 46 Pete // Sep 24, 2009 at 8:49 pm

    Anon:
    You do make a decent point about bank insurance.

    Who will bail out the insurers? It really starts to spread into other areas of the economy once that starts…

    Senator13:
    How do banks have wiggle room? If they up their rates they will push people (especially FHBs) to the wall, which is precisely what they don’t want to do.

    If they up their standards of who they lend to (and they are anyway) they will essentially bring down the market, because they won’t be providing enough credit to the property market. Which means less demand. Which means lower prices, negative equity, etc.

  • 47 Senator13 // Sep 24, 2009 at 9:01 pm

    People did have loans (some fixed at higher rates then at the moment and others now repaying at a substantial discounted rate) before the GFC and if this is the start of things stabilising for big business and some confidence to come back you don’t think the banks can keep their heads above the water?

  • 48 Pete // Sep 25, 2009 at 12:08 pm

    Senator13:
    Since the GFC property prices have risen. Masses of First Home buyers have been lured into the market, and interest rates have been reduced. Mortgage holidays have been provided to a lot of people (I think the figure was about 35,000).

    The more house prices go up compared to wages, the more trouble people will be in. Particularly if interest rates rise.

    See, artificially low interest rates (emergency rates?) have helped people out a lot. I particularly note the large number of people that tell me “but buying is only slightly more expensive than renting!” and “rent money is dead money”. I’m not going to get into those except to say that changes in interest rates will dramatically affect peoples ability to repay their debt. Couple this with increases in house prices, increases in the cost of living (CPI, fuel prices, electricity prices, import prices) and issues with employment (such as wage freezes, unemployment), then you have some big issues.

    A nationally reckless approach to both borrowing and lending means that a lot of people have taken low interest rates for granted and are simply not prepared for rising interest rates. The absence of an RBA interest rate rise for more than two years does not imply it won’t happen. We especially need to consider that the RBA does not regulate bank mortgage rates, and that they will raise rates independently if they need to pass on costs.

    The argument of “people have coped so far” doesn’t means that there won’t be problems. We need to consider why they have coped so far (and if they truly have) and whether they will cope in the future.

  • 49 Ned S // Sep 25, 2009 at 1:36 pm

    I don’t know if your figure of 35,000 is correct or not Pete but I did see report a while back quoting a large number under a heading like Mortgage Stress Rises that when looked at a bit deeper was actually talking about the total number of people banks had cut a bit of slack regarding all sorts of credit – Including credit cards which I’d guess was the very great bulk of it. (No specific breakup of the different types of credit was given.)

    There are some pretty iffy reporting strategies out there – Anything to attract a reader and even if the stats aren’t about housing as such, then having the heading make it look like they are seems to do the job while also satisfying Oz standards of journalistic integrity these days.

    I guess it pays to keep in mind that while the people writing the bulk of this stuff were hard working and smart enough to qualify for a university place in media studies or some such, law, medicine and even the sciences probably weren’t open to them as options?

  • 50 Ned S // Sep 25, 2009 at 3:12 pm

    Yes the BDI is going the wrong way Greg. And was that the bottom starting to drop out of oil?

  • 51 Greg Atkinson // Sep 25, 2009 at 4:01 pm

    Ned with oil being in U.S dollars I think some of the recent decline has been to do with the stronger USD, although I have seen a few reports about the demand for oil still not picking up in the U.S. and that would also keep the price down.

    The BDI is more of a worry because it ties in with reports about Chinese demand for coal weakening. I suspect demand for other hard commodities might be coming off the boil as well. That is not going to help the Australian GDP numbers in Q4.

  • 52 Pete // Sep 25, 2009 at 4:44 pm

    Ned:

    The 35,000 mortgage holidays figure was from my memory of this article:
    Families gripped by financial hardship

    Turns out the figure is actually more than 55,000 this year…and that is not including CBA who have the most mortgages.

    We could possibly assume it was more than 75,000 including CBA, but there is no way to know.

    I am not sure about the proportion of these people compared to total mortgages – I couldn’t easily locate that information. The article says that the holidays are being given to families, so I assume that does not apply to speculators/investors.

    One issue, that I raised before (Aussie Home Prices pt2 #77), is that banks have used these ‘holidays’ to avoid writing off losses on their books this financial year. And this financial years reports were really important to the financials market. It is dog-eat-dog out there and the underperformers will suffer share price losses. Which makes it harder to raise capital. It becomes clear they are willing to use any methods that are available to make things seem better than they are. So that is something to keep in mind…things are likely to be much worse for the banks than they report (because if it was better they’d be sure to let us know right away, in exaggerated fashion).

    (Sorry to bring property into the comments on this article)

  • 53 Ned S // Sep 25, 2009 at 6:45 pm

    G’day Pete – Yes that is the type of article I saw. Specifically it says:

    “In the past year, Westpac, St George, ANZ, National Australia Bank, BankWest, ING Direct and Citibank have extended a financial lifeline to 55,362 people unable to afford their mortgage repayments, personal loans or mounting credit-card debt.” Where I read the “personal loans or mounting credit-card debt” bit and say, Yes so what, people are always defaulting on those, and I bet they make up the great bulk of the hardship applications. (As specifically opposed to housing mortgages as such.)

    With an article link on the same page under “Related Coverage” reading “Home Loan Stress soars” leading to a spiel that gives pretty much the same sorts of numbers writen by the same author – But nothing specifically on home loans as such – Except one reference that says “About 3300 ANZ mortgage customers are deferring home loan repayments.”

    At which point I say What is special about ANZ bank customers and do a search on ANZ staff cuts and find the bank has been chopping lots of staff and I guess that just maybe part of it is that those staff that have been axed do get mortgage holidays. And maybe even the reason they got axed was because ANZ was a bit brittle because it had issued a few more dodgy loans than most – Not that I know any of that for sure of course.

    http://www.businessday.com.au/business/anz-whispers-jobs-gone-20090708-ddej.html

    But either way, I sure want more info before I even go close to interpreting that article to mean that 55,000 families are on a mortgage holiday. Despite the fact that the article almost seems to go out of its way to mention the words “mortgage” and “homeowners” and even throws in a heart warming line that says “Treasurer Wayne Swan said the provisions were stopping families losing their homes.” While I’m asking if the article is really telling me that the provisions are stopping some silly kids who are up to their ears in personal loans and maxed out credit cards from defaulting on them?

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