In my last post I noted that we were still waiting for consumers to come to the party.
I argued that it can only be confidence holding them back. They've been paying down debt for 5 years. Interest burdens are falling and incomes are growing. And their net worth is increasing.
They're sitting on bulging pockets, full of cash.
And so they could be primed for a rapid comeback, but until they do, we're left waiting, and the economic recovery is going to have trouble breaking above the cloud line.
That's just where we're at.
And so one of my readers asked me, ‘so what do we do about it?'
Is there some sort of policy ‘fix' for this situation?
Well, I've got a few thoughts on that. Now I don't pretend to be a political expert. I don't even pretend to be an economist. I do pretend to be a race-car driver sometimes.
But it is a very interesting conundrum. And it's certainly not the first time that a western economy has found itself in the same jam.
So let's break it down a little more.
From an economics perspective it's a bit curly. At one level a high savings rate is good. It's puts aside the money we need to fund the infrastructure (and wealth) of tomorrow. If we didn't save anything, we'd consume all our beans, and eventually be left with nothing.
But at the same time, if savings is too high, then we're not consuming. And if consumers aren't consuming, then businesses aren't investing in production. And if we're not investing, then we're not building the capacity to build wealth tomorrow AND the economy can kind of grind to halt.
Yep. It's a tricky and prickly one.
So the question then is, when is savings too high? Well, we've opened up a can of worms there. Economists won't be able give you a straight answer on that (like they ever give you straight answers). In short, it probably depends on where you're at.
There's going to be an art to getting the balance right. But with 5 years of above trend savings behind us, I'd argue that it's time to shift the balance back towards consumption.
Ok, we'll how could we do that?
Well, first of all, we can make consumption cheaper and more appealing. That's where Glenn ‘gun-happy' Stevens comes in. Interest rate cuts make the cost of borrowing to fund consumption cheaper, but it also makes saving less rewarding, by reducing returns on normal bank deposits.
Trouble is, that so far, this doesn't seem to be doing the trick.
As I've said, a lack of confidence is a real anchor weighing on consumption, even with rates at 50 year lows.
Blimey. So how do we fix that?
Well that is a very interesting question. And the answer is probably political.
I don't know what you think, but I'd argue that the government is probably the only institution with the will and the resources to actually create a shift in consumer sentiment.
And I'd argue that, given how much swings on it, it is has a mandate, if not an obligation, to get its hands dirty with this problem.
Not that I think that the government should engage in endless panglossian propaganda. But I could see a role for an institution that reminded Australians of just how good we have it from time to time.
Boy could we use that now.
And not that I'd want the government to be endlessly pumping consumption. As I said, saving can be a good thing. But I do think there could be a role to play in actively getting the balance right.
We already lump too much on poor old interest rates. Poor old Glenn's got to guide a multi-billion dollar economy with one simple lever.
Ultimately, it's exactly the kind of thing that'd I'd support government getting involved in. Confidence is a public good. Nobody's going to (or even could) go out and make it on their own, but everybody would benefit.
Oh to dream.
But it's never going to happen.
First of all, I wouldn't trust any product of the current political system with that kind of power. I'm not a cynic, but I just can't see any politician seeing past their own re-election ends to the greater national good.
Ok yes, I am a cynic.
And I don't see the political system rising above the theatrical farce that passes for politics these days. (I say ‘these days' because it's nice to believe that once, we were blessed with meaningful and intelligent political debate. But I doubt that was ever the case.)
Because you see it play out over and over again. The government (red or blue ties) tries to talk up the economy. If they can convince households that the economy is going well, consumers will consume, and it will be a self-fulfilling prophecy.
But at the same time, the opposition knows that if they can scare households enough about the direction of the economy, they might get them motivated enough to turf one bunch of ties for another. Fear = potential votes.
And with a media that knows that readers will pay good bucks to be given a good scare, there's no shortage of hacks who'll give this debate-that's-not-a-debate all the heat it needs. Not in any meaningful way – just enough to keep the public at a comfortable level of panic. Fear = sales.
But this theatre of make believe has a real impact on the economy. If the opposition wins the battle of narratives, then consumers get scared and the economy shrinks. If the government wins, then consumers consume and we do ok.
That seems a very high price to pay just to let a bunch of ties in Canberra argue about who gets to be boss.
But that's the system we've got. And useful debate on meaningful problems (are we saving too much? do we need to be investing more?) never gets the air it needs.
And so we're stuck with a system where consumer sentiment and our economic fortunes swing on the persuasive power of self-interested politicians. If that sounds tragic, it's because it is.
Ok, I'm being a bit of a downer today. Anyone else see a way out of this mess?
But the real question is how do we play it as investors?
Well, the more people I talk to in the industry, the more people I talk to on the street, the more I get the sense that the election is weighing on people's minds – probably more than it should.
As I said, I don't think it will make as much practical difference as people think it will – not to the big picture. But the election is making the future seem uncertain, and this is holding confidence back.
But on my analysis – that's the only thing holding things back. Once it clears, things could bounce back very quickly.
And consumers will start consuming again at some point. They just won't keeping hoarding more and more cash.
So it's another reason to me to get in ahead of the herd. While they're still dithering and worry about an electing ties, you can get in there are grab the bargains before the next bull run launches.
Fortune always favours the bold.