The Recession We Have To Have
The Recession We Have To Have
As a child I always ate my vegetables first and saved the steak for last, bowled first and batted last in backyard cricket and ate all the tiny Easter eggs first. If there’s medicine to be taken, I want it now.
Which is why I’m one of the few investors in Australia supporting the Reserve Bank’s restrictive monetary policy and of the opinion that they should keep the cuts to a minimum. I’m fully aware high interest rates – relative to the past decade at least – are hurting the economy, hurting the stockmarket and hurting my business. But we don’t have an option; it’s either suffer some pain now and correct the imbalances in our economy, or deal with a much bigger problem a few years down the track.
For the past decade, the Australian consumer has been on a borrowing binge. The ratio of household debt to disposable income is now 1.6 times – more than double the level of just 10 years ago.
Free-flowing credit has enabled us to take tomorrow’s consumption and have it today. In the quarter to June 2002, for the first time ever, we consumed more than we earned – the savings rate turned negative (in the 1970s it was in excess of 10%). Between then and March 2008, total consumption exceeded total disposable income by $284 billion.
As any Ponzi-scheme operator can tell you, the life cycle of funding a cashflow deficit with more and more debt is limited. Not surprisingly given Australia’s burgeoning debt pile, the percentage of income required to service the interest payments has also blown out. In March 1994 it was 5.5%. In March 2008, 13.9% – the highest level on record.
We’re a rich country and can afford to service some debt. But at some point we’re going to have to live within our means. And we need to accept that getting from where we are today to a level of consumption that’s sustainable will most likely cause a recession. A huge cut in rates might delay the pain, but it won’t make it disappear – it’s the recession we have to have.
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I was always happy you batted last. It meant I got to bat for as long as I liked. Then after I tired of dispatching your long hops over Mrs Ftiz's fence I only had to bowl the 'It's time to watch Monkey Magic' yorker before going inside.
Plus, as the older brother, batting first means you reduce your exposure to tantrum risk, always something to consider in backyard cricket. You should have gone into insurance Brendon.
Nice blog SJ, no pain, no gain!
I still believe in Keynes. We are in a situation where consumption expenditure is fairly static (down 1% or so which is statisticly meaningless) while investment expenditure is up 27%. So batten down for high inflation. Also if any of our banks get into trouble the reserve bank will have to roll the money printers to bail them out.
Econmist Steve Keen has some interesting graphs on the situation too.
I also believe that at some point in the future there must be a reckoning.
I believe the Reserve bank is still trying to dampen demand and inflationary expectations but have decided due to depression level business and consumer sentiment indicators that perhaps rates went up too quickly due to the banks raising rates beyond the reserve's rates. Therefore I do not believe they will loosen the rates quickly. They may even raise them again as C'Wealth CEO stated recently. Another thought is perhaps the Reserve is also trying to act preemptively in view of the IMF's 1 Trillion losses of sub-prime only being half way through and there being a possibly massive problem when they bail out of Freddie and Fannie Mac as well as possibly another 100 banks in US alone within the next 6 months.
I expect unemployment to rise to around 6% by end of next year and for house prices to fall at least 20% - which will stress banks debt provisioning further - as houses are still ridiculously unaffordable as a multiple of the average wage -around 7 times when in rest of the world it is around 4 times!!.
So in my humble opinion I am expecting a recession which I hope will be quick and severe like pulling a band-aid off rather than long and painful - like the torturous Chinese death by a thousand cuts.
What always surprises me is that when a bubble was obvious in 2007 they did nothing - in fact they encouraged the wealthy to put a million into super and now that they have a problem, instead of letting the market find the true price quickly they interfere so much that volatility becomes extreme and people become even more uncertain and therefore stay out of the market for longer and businesses hold off further expansion or even downsize until the future is clearer.
Also at present the recession may be nasty as we are already seeing slowing growth and high inflation - a return to the dreadful 1970's stagflation problems if we aren't lucky.
Cheers,
Ben
www.imagi-natives.com
Is the resources boom over?
If not ... why not?
Today's grandparents faced mortgage rates of 12.5% to 16% in the 1970's. Their 1st house was about 15 sq, no new car in the driveway never mind two cars, often no garage with the house, little furniture, uncarpetted, uninsulated. We got on with life and bought things as money became available. The scream about high interest rates at 9% is a joke. Everyone seems to want 30 sqs, 3 bathrooms, TV lounge, 4 bedrooms, 3 garages and all for 2 or at the most 3 people - get real! Your pain is your own doing.
Dave
Charles Dickens character, Mr. Micawber, said it all.
"Income one pound expenditure nineteen shillings and sixpence, result happiness. Income one pound expenditure twenty one shillings, result disaster".
Some things never change.
Spoken like a true backward supporter of the ye old Keating propaganda, say something negative in a positive way & become a legend. Steve you have a huge,I mean huge history of share picking failure & I can tell you that I am history to that. Let me know if you care to ever debate that one. So for someone as yourself who failed totally to understand our tremendous bull market of recent years how in the hell whould you have any idea of the future let alone any sort of dare devil philosophy about the current situation is beyond me. It takes the cake when naive statements like yours are made and then you open up a the forum for comments. Well you asked for it. The audacity of holding yourself to such a prediction & then basing it on a history of vegetabe eating habit, etc shows great foresight, however while I think I might get your drift it illustrates a shallow understanding you may have for economics.
Look here in my folks days they also bought houses for cash
as banks were so difficult for the average family to deal with. It was also a time when families of 6 could exist on the man of the house was the only bread winner. The economy was entirely different. World trade hardly existed. I'm not going to go on with all this. I'm ending it with one sentence.
Wishing for a recession as the absolute cure for a country whose own wonderful economy is hardly in any sort of dire straits is a very shallow & simple declaration that could only be made with minimum insight. The rest of you who support it are the typical heard pack dooms dayists destined to miss any opportunities.
I wonder how much our government is using scare tactics to convice us that the situation is getting from bad (sub-prime, oil prices, housing and rental costs) to worse (add the monster of the greenhouse emissions and the cost we'll all have to pay to offset them).
What's your opinion? Do you think greening Australia will cost us an arm and a leg, or is it current government's method to make us spend less?
I think Jacks comments above are of some concern and certainly hope that steve will defend himself for the sake of subscribers.The concern of inflationary forces is mitigated by the deflationary force of declining asset values(with further declines in property values of all kind highly likely).Although interest rates have declined marginally it will be very dificult even with further drops for previously evident headwinds to reemerge.First we live in a global environment and one which is declining each day.Second the banks have copped a spanking with worse to come and thier lending pratices for the forseeable future have been altered.Third the wealth effect from share markets and soon to be property(in all likelyhood)is being adversely affected.This will be particularly evident in the retires who have been hit hard(and industries exposed to this will be adversely affected for example sanatised travel and interestingly even healthcare delivery where i have noticed a significant drop in business in the private healthcare sector)Fourth the element of fear in the community(which is linked to the above but not completely) will not evaporate in a short period.Fifth there is still a degree of denial as to how bad things really are in particular by those who are detatched and all the economic indicators are lagging and things are changing very quickly.Overall I think we are already in deep trouble and in fact believe interest rates were kept to high for too long and am not convinced that dropping interest rates in an aggresive fashion is going to make much difference(go ask the Japanese to ellaborate on this further).As a finalpoint I really do believe you should defend your stock selections(ie timbercorp)in light of all that has been outlined in this forum and believe it would be helpfull to copublish the beliefs of the most sceptical of your team for a contrasting viewpoint
Having just returned from Korea where there is growing pain in the community becasue inflation has really started to get out of control now just under 6% and the monetary regulators are having to raise interest rates despite the fact that spending is slowing I'm grateful for the fact that Australias interest rates have been higher for longer and maybe just maybe we will not be hit as hard as what is now starting to be a growing number of western / modern economies all beginning to see rising inflation and only one way of dealing with it. In Korea the unions are demanding significant wage rises to obviously help them cope with inflation and yet that of course will only add fuel to the inflation fire and in turn the need for further interest rate rises. You cannot spend more than you earn indefinitely and yes we would all like it now but I for one agree with Steve better some pain now than a lot more later.
One thing that hit me if Korea is to be seen as representative of other SE Asian countries is that they are far from decoupled from the west and even if you wanted to argue that they are decoupled then I would still say they are running parrallel to our economies, i.e. too much cheap money for too long, excessive spending and driving up demand and now inflation that needs to be controlled. A very interesting 12 - 24 months lay ahead.
I have to agree with Jack Hart on one point... Intelligent Investor have made a few bad calls which undoubtedly have cost a lot of people some money. II seem to have missed the bull market completely and (dis)missed the resources boom... Trying too hard to be contrarian? Perhaps. Stock analysis needing some more depth? I think so especially when compared to the detailed research others put out... I subscribe to II and read it regularly, its a good read but with a pinch of salt...
We interrupt this blog with an announcement:
The score is now 5/107. Brendon's team have recovered from losing 3/6 in 2 overs with a 6th wicket partnership of 46 off 26 balls. Pitch is still sticky and grey clouds are interspersed with brief patches of sunshine.
Given time the boys will likely move on from backyard cricket, hopefully with lessons learned, and the results of the 3rd test of 1979 will be forgotten as cricket moves to new and untested waters of 50 over matches and heaven forbid 20/20.
It would appear that Jack Hart fellow has somehow misunderstood that II frequently makes efforts to be as entertaining as possible for its readers. Hence all the sillyness about backyard cricket, eat yer peas kids, and the finer points of easter egg consumption. Paul Keatings comment must have been confusing to many people in our country, for at the Queensland Performing Arts Complex a play entiled, "Keating - the musical we had to have", has shown sometime over the past 24 months.
All I will assume is that in being a journalist, it is likely not easy to please everyone all the time, nor even some of the people, some of the time.
I have heard all the gossip about how stringent and strict Macquarie are when hiring people, so from that I will assume that if Mr Johnson, did not understand what a bull run is, then he would have not been working for them in the past.
As for the failed stock pickings, (maybe this Jack Hart fellow can back up his mouth, however), in speaking for myself. I choose not to comment about this subject due to inexperience and people in glass houses should not throw stones.
All someone such as myself can hope for is that the Keating muscial wasn't really bad, considering that we had to have (see) it!!! Hey whilst on this subject didn't Benjamin Graham write a musical that was in the theatres for about a week. Do value investors have to have a viewing of it?
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