I've been watching events in the USA and the UK with some interest the last couple of weeks, as the consequences of some recent decisions made by those countries have started to manifest themselves.
In the USA, the equities markets have copped a pounding as the Chinese finally grew tired of the Twitter-tariffs and in a move that was clearly calculated to annoy the petulant infant in the White House, let their currency fall below a critical level against the US dollar. This then set off a flight to bonds and widespread predictions of a recession.
Coupled with this are rising tensions in the Middle East. The decision by the US to pull out of the Iran nuclear treaty and impose crippling economic sanctions has had the predictable effect of goading the Iranians into showing their teeth by impounding vessels and blockading a key sea passage. The likelihood of fresh military action is growing daily, somewhat ironic when you consider Trump's aversion to having anything at all to do with that part of the world.
Finally, the latest round of mass shootings and the increasing trend of these attacks being carried out by white supremacists has drawn fresh attention not just on the lack of action on gun control but what effect Trumps's incessant racist tweeting has had on emboldening the perpetrators.
Meanwhile over the Atlantic, the Brexit deadline is fast approaching and with it, the real prospect that the UK will crash out of the EU without an agreement and the 2 year transition period that would have come with it. The mind boggles at what's going to happen at the end of October but I for one won't be going near the place for at least 6 months afterwards. The prospect of waiting another 24 hours at Heathrow to get into the country after enduring a flight of the same duration has absolutely no appeal. There's another irony at play when you consider the Brexiteers' campaign slogan in the context of what's likely to happen shortly post-Brexit, namely Scotland and potentially Northern Ireland leaving the UK. "Taking Back Control"? Hardly. More like, "Spiralling out of Control".
Because that's the problem with decisions based on a populist agenda compared with ones based on careful consideration of the facts and the likely consequences. Eventually this annoying thing called reality gets in the way and bad outcomes that would have been obvious with even a basic level of forward thinking start to happen.
Of course, Trump's decision making has never been guided by any level of strategic planning or careful thought. With very few exceptions, everything he has done in office has been driven either by ignorance or his pet grievances, like the way China conducts business, his admiration for despots like Putin and Kim Jong-Un, his hatred of Iran and more generally, anybody who isn't white. The really scary thing for the USA is that while Trump has absolutely no plan for how to manage the escalating trade dispute with China, you can bet your bottom dollar the Chinese do, and with a centrally controlled economy and a totalitarian government, they have the ability to take measures which could seriously harm the US economy - measures that aren't available to a democratic state like America.
In the UK, running the country you now have the man who Trump, in his typically conceited manner, labelled "Britain-Trump". However, the reality is that Boris Johnson is a very different character to Trump. For a start, it's kind of difficult not to like him even though you really don't want to. While I'm positive it's an act, he has got the daffy, eccentric Britisher shtick down to a T, and the phrase "it takes a lot of intelligence to come across that stupid" could have been invented for him. Also unlike Trump, he appears to have a strong sense of civic duty and I think he genuinely cares for and wants to do the right thing by his constituents, rather than just himself.
There is though one important flaw that the two men share - they are both egomaniacs. I've got no doubt whatsoever that Johnson believes he will march into the EU headquarters in Brussels sometime in the next couple of weeks and get them to tear up Theresa May's deal and give him everything he wants.
There's just one problem with that approach: the EU aren't going to. Businesses know that, the financial markets know that (hence why the Pound has been sinking against the Euro and US dollar), and deep down, even his supporters in the Tory party know that, which is why they have been quietly making preparations for what's coming to them on 31 October. I doubt very much that David Cameron foresaw years of potential economic pain and a splintering of the United Kingdom when he unbottled the Brexit genie, but this is now what's going to happen, solely because of a lot of populist grandstanding in the Parliament and poor decision making.
What I find so confounding about populist world leaders is that in just about any other walk of life, they would be recognised for what they are and shown the door pretty quickly. Could you imagine for instance if the board of Apple or Amazon appointed someone with Trump's history of financial malfeasance as CEO? The company's value would dive and the shareholders would be baying for blood.
Similarly, imagine if either Trump or Johnson got appointed as principal of a fancy private girls school. It's hard to see the parents and friends association tolerating a sexual predator who boasts of pussy grabbing and who has a weird physical obsession with his own daughter being put in charge of their kids' education. Action would be taken swiftly to deal with any inappropriate behaviour, and the pressure would not relent until they'd been given the boot.
Yet when it comes to the most important job in the country, people seem to have a limitless tolerance for incompetence and bad behaviour, and any public criticism of it tends to last no more than a day in the media cycle. Richard Nixon must be looking up from Hell and cursing his luck that he wasn't born 45 years later so he could be President in the modern age where the lengthy and sustained investigation which exposed the Watergate scandal would simply never have happened.
Encouragingly, though, there are signs that the natives are getting restless in both countries and that the political leaders might finally about to be held to account for their actions. If you're the sort of person who votes for a pig-ignorant bigot like Trump, it's all well and good to cheer them along when they go poke China with a stick or let you hang onto your private arsenal. However it's only natural that you'll start to think twice about re-electing them when there's a chance that as a direct result of the decisions they make, your house drops 40% in value or you find yourself in a shopping mall confronted by a deranged lunatic wielding an assault rifle.
It's kind of worrying what is going on at the moment, but maybe some of these disasters need to play out as a condition to returning to a more sensible and considered public debate, and to stop leaders doing what's popular with their support base and instead act in the best interests of their countries. And who knows, if governments have enough courage to be honest with their citizens about the challenges they are facing, they might be prepared to put up with some things they disagree with in the short term and let the government focus on securing long-term prosperity.
Which, I'm afraid, won't be able to be done by starting a war in the Middle East, playing tariff "chicken" with China and inadvertently causing a break up of the UK.
17 August 2019
04 August 2019
Don't put your Pocket Money in the Bank, Kids
Growing up in the 1970s, saving money was quite the done thing. Children our age were always encouraged to put aside some of our pocket money in a piggy bank (which was usually supplied to schools by the local branch of the government-owned Commonwealth Bank), then when the piggy bank was full of coins, off we would toddle to the bank with our passbook to deposit it in our account.
Leaving aside how quaint this sounds in the modern age, putting your money in the bank wasn't a bad investment back then. With interest rates being around 8-10%, if you could avoid the temptation of spending your money on Popsicles or Wizz-Fizzes, you got paid a reasonable return on your money.
Nowadays, however, it is a very different story. Official interest rates are now at record lows, and the consensus opinion from the experts is that they're heading lower, possibly to zero within a year. I read an article this week that both central bankers and politicians in Australia have been puzzling over the reasons why cutting rates to this level has not had the traditional effect of stimulating economic growth and inflation, despite the unemployment rate being quite low (which of course suggests wages ought to be going up).
I for one was surprised by their confusion, because if you give it a bit of thought, the reasons are pretty obvious. And they're the same reasons why right now I can't see inflation (and therefore interest rates) going up significantly in the next 10 years, and probably longer.
First and foremost, there is the impact of technology. With a few exceptions, technological advances generally create a deflationary effect. To give an example: I remember going down to the record shop in 1979 to buy my first LP - "Discovery" by ELO - and it costing me $8.50. Now, some 40 years later, if I want to buy a digital copy of the same album (as opposed to committing fraud and downloading it for free), I can get it via m3 Millions for $0.96. At this price I seriously recommend you check it out !
The same applies for any other media that is capable of being transmitted electronically via the internet - books, movies, games, newspapers - all these have become significantly less expensive over time as you take out most out most of the links in the supply chain and simply click on a link to download or stream something.
Communications are another good example. I remember calling home from university in the 1980s and having to reverse the call charges because talking on the phone to your parents from 120km away was prohibitively expensive for a student; never mind doing so from overseas. Now of course it's possible to Skype, Whatsapp or SMS to most places in the world for free. Small wonder then that Telstra shares have halved in value in the last 5 years.
The second reason why inflation has stalled has to do with economic globalisation and poorer countries in effect "exporting" deflation to the rest of the world. Leaving aside the moral argument for a moment, but if you are a multinational corporation engaged in manufacturing, where are you going to set up your factories? In a country like Australia with relatively high wages cost and sophisticated employee protection laws, or somewhere like Bangladesh where you can get away with more basic working conditions and paying people low wages? It's no surprise therefore traditional manufacturing has moved away from first world countries and why the cost of clothing and Nike runners hasn't gone up in Myer for ages.
This situation is unlikely to change when there are no end of people in Asia and Africa still living in grinding poverty and who would welcome any sort of job to help lift themselves out of it. Therefore, once the likes of China have become fully industrialised and labour costs start to rise, watch the manufacturers move to the next low cost country in a bid to keep their production cheap.
The other obvious factor behind the torpid growth and inflation figures is the inability of political leaders to implement the necessary structural changes to the economy which might set it up for future growth. It's impossible to contemplate how the major reforms that took place in the 1980s and 1990s and which set Australia up for a golden run of growth will be repeated in the modern, fractured political environment with its emphasis on short-term spin as opposed to long-term strategic planning.
Malcolm Turnbull at least saw the importance of establishing a vibrant technology and innovation sector of the economy similar to what the USA has managed to achieve, but like most initiatives of his government, the proposal became still-born amongst all the Coalition infighting. So unfortunately it's hard to see an immediate future where the economy diversifies significantly away from the historic staples of mining and agriculture. It's part of the reason why the USA's stockmarket keeps hitting fresh record highs while ours has barely got back to 2007 pre-GFC levels.
The RBA is right in a way when it scratches its head about how this can be happening in an environment where the unemployment rate is a fairly low 5.2%. Normally when unemployment gets to this level you would expect upward pressure on wages and increased levels of consumer confidence, which in turn leads to higher spending.
However, when you think about it, the raw number doesn't tell the whole story. Like a lot of things these days, the nature of work has become more transitory and impermanent, not to mention heavily disrupted by technology in a lot of industries. It would be very hard for example to feel confident enough to go invest in a new car when you're employed on a casual basis in a company that publishes phone books or street directories. Or you are up in the Kimberleys driving a mining truck and Rio Tinto's plan to introduce driverless trucks is all over the news.
Ultimately I think the whole notion that humans will be replaced by robots in a whole host of industries is overdone, but nonetheless its true that technology has, in a fairly short space of time, turned a lot of industries that had been happily chugging along for centuries completely on their head. Now there is even talk about automation disrupting the two oldest professions in the world - law and prostitution - so it's understandable in that context that people are anxious about their jobs, and therefore less likely to spend up big than they have been in the past.
So against this local backdrop, and a similarly anaemic economic world outlook which is being hit with "own goals" like Brexit and Trump's idiotic tariff war, what is likely to happen with interest rates? The economy MIGHT kick a bit but it would take some major event like another 2006-style mining boom (unlikely) or a sharp uptick in immigration (very unlikely) to accelerate growth and generate inflation. Given the other factors creating deflation aren't going away any time soon, the far more likely scenario is that things just continue as they are and we just get used to being another developed, low growth, low interest-rate economy like Japan or the EU.
Which is great if you are a young tacker looking to buy lollies because the price isn't going to go up, but not so good if you are a conscientious saver. If I were a child again, I think this time I'd be going for the lollies no matter what my parents said. Sugary delights have got to be more rewarding than earning 0.25% on your money.
Leaving aside how quaint this sounds in the modern age, putting your money in the bank wasn't a bad investment back then. With interest rates being around 8-10%, if you could avoid the temptation of spending your money on Popsicles or Wizz-Fizzes, you got paid a reasonable return on your money.
Nowadays, however, it is a very different story. Official interest rates are now at record lows, and the consensus opinion from the experts is that they're heading lower, possibly to zero within a year. I read an article this week that both central bankers and politicians in Australia have been puzzling over the reasons why cutting rates to this level has not had the traditional effect of stimulating economic growth and inflation, despite the unemployment rate being quite low (which of course suggests wages ought to be going up).
I for one was surprised by their confusion, because if you give it a bit of thought, the reasons are pretty obvious. And they're the same reasons why right now I can't see inflation (and therefore interest rates) going up significantly in the next 10 years, and probably longer.
First and foremost, there is the impact of technology. With a few exceptions, technological advances generally create a deflationary effect. To give an example: I remember going down to the record shop in 1979 to buy my first LP - "Discovery" by ELO - and it costing me $8.50. Now, some 40 years later, if I want to buy a digital copy of the same album (as opposed to committing fraud and downloading it for free), I can get it via m3 Millions for $0.96. At this price I seriously recommend you check it out !
The same applies for any other media that is capable of being transmitted electronically via the internet - books, movies, games, newspapers - all these have become significantly less expensive over time as you take out most out most of the links in the supply chain and simply click on a link to download or stream something.
Communications are another good example. I remember calling home from university in the 1980s and having to reverse the call charges because talking on the phone to your parents from 120km away was prohibitively expensive for a student; never mind doing so from overseas. Now of course it's possible to Skype, Whatsapp or SMS to most places in the world for free. Small wonder then that Telstra shares have halved in value in the last 5 years.
The second reason why inflation has stalled has to do with economic globalisation and poorer countries in effect "exporting" deflation to the rest of the world. Leaving aside the moral argument for a moment, but if you are a multinational corporation engaged in manufacturing, where are you going to set up your factories? In a country like Australia with relatively high wages cost and sophisticated employee protection laws, or somewhere like Bangladesh where you can get away with more basic working conditions and paying people low wages? It's no surprise therefore traditional manufacturing has moved away from first world countries and why the cost of clothing and Nike runners hasn't gone up in Myer for ages.
This situation is unlikely to change when there are no end of people in Asia and Africa still living in grinding poverty and who would welcome any sort of job to help lift themselves out of it. Therefore, once the likes of China have become fully industrialised and labour costs start to rise, watch the manufacturers move to the next low cost country in a bid to keep their production cheap.
The other obvious factor behind the torpid growth and inflation figures is the inability of political leaders to implement the necessary structural changes to the economy which might set it up for future growth. It's impossible to contemplate how the major reforms that took place in the 1980s and 1990s and which set Australia up for a golden run of growth will be repeated in the modern, fractured political environment with its emphasis on short-term spin as opposed to long-term strategic planning.
Malcolm Turnbull at least saw the importance of establishing a vibrant technology and innovation sector of the economy similar to what the USA has managed to achieve, but like most initiatives of his government, the proposal became still-born amongst all the Coalition infighting. So unfortunately it's hard to see an immediate future where the economy diversifies significantly away from the historic staples of mining and agriculture. It's part of the reason why the USA's stockmarket keeps hitting fresh record highs while ours has barely got back to 2007 pre-GFC levels.
The RBA is right in a way when it scratches its head about how this can be happening in an environment where the unemployment rate is a fairly low 5.2%. Normally when unemployment gets to this level you would expect upward pressure on wages and increased levels of consumer confidence, which in turn leads to higher spending.
However, when you think about it, the raw number doesn't tell the whole story. Like a lot of things these days, the nature of work has become more transitory and impermanent, not to mention heavily disrupted by technology in a lot of industries. It would be very hard for example to feel confident enough to go invest in a new car when you're employed on a casual basis in a company that publishes phone books or street directories. Or you are up in the Kimberleys driving a mining truck and Rio Tinto's plan to introduce driverless trucks is all over the news.
Ultimately I think the whole notion that humans will be replaced by robots in a whole host of industries is overdone, but nonetheless its true that technology has, in a fairly short space of time, turned a lot of industries that had been happily chugging along for centuries completely on their head. Now there is even talk about automation disrupting the two oldest professions in the world - law and prostitution - so it's understandable in that context that people are anxious about their jobs, and therefore less likely to spend up big than they have been in the past.
So against this local backdrop, and a similarly anaemic economic world outlook which is being hit with "own goals" like Brexit and Trump's idiotic tariff war, what is likely to happen with interest rates? The economy MIGHT kick a bit but it would take some major event like another 2006-style mining boom (unlikely) or a sharp uptick in immigration (very unlikely) to accelerate growth and generate inflation. Given the other factors creating deflation aren't going away any time soon, the far more likely scenario is that things just continue as they are and we just get used to being another developed, low growth, low interest-rate economy like Japan or the EU.
Which is great if you are a young tacker looking to buy lollies because the price isn't going to go up, but not so good if you are a conscientious saver. If I were a child again, I think this time I'd be going for the lollies no matter what my parents said. Sugary delights have got to be more rewarding than earning 0.25% on your money.
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