Most of the media has completely misunderstood what happened in Washington…

America is dead. It’s done for. Throw a flag over the coffin. It’s all she wrote.

The “failed coup attempt”, the “insurrection”, the “riot”, the “mob” or whatever you want to call it – is the first crack in a great nation splintering to pieces.

Time to give up on America and all start learning Mandarin or Arabic…

That’s the vibe, right? That’s the general gist of what we’re seeing in the ABC or the Guardian or even Nine and Seven.

It’s the end of American democracy.

What a load of rubbish.

If I have to read this one more time I’m going to put on my horned shaman hat and occupy Woolworths.

Let’s unpack it a little bit.

First up, let’s be clear about what we’re talking about.

We’re talking about a protest, maybe a ‘riot’ at best, but only in isolated moments.

Yes, some people at the (rally / protest / dance party) were there to overthrow the government. That’s what they came for.

But one lone nutter does not a revolution make.

And it sure as heck wasn’t a ‘coup’. I think you need at least one tank to call it a coup, and generally you seize the media channels at the same time as you seize the institutions of power.

That didn’t happen and there was no attempt to make it happen. As I said, Trump’s calls for insurrection were pure posturing, and it’s why it only took a few hours for him to turn around and throw all of his “insurrectionists” under the bus.

“We love you… but go home.”

And yes, it highlights divisions in America.

Yes, it reminds us that there are some people with some pretty radical ideas. Many of those people have guns.

But that’s America for you. It’s all on show.

America is that crazy uncle who has decided to stop pretending he’s crazy.

China, Russia – they’re your prudish aunties who keep any hit of madness violently supressed under a barrage of benzos and charity work.

The riot in the American capital was not evidence of American democracy failing. It was evidence of it working.

It was evidence of diversity of opinion coexisting – of the nation’s most radicalised being able to blow off steam, and the organs of government just chugging along and doing what they were supposed to do.

American democracy was tested, and I reckon you’d have to say it passed.

And at what cost? A death toll of just five people, and most of those not even direct.

When you’ve got a million people dying of starvation, then call me up and tell me about a nation falling apart.

Yes it was messy. Yes it was ugly. But that’s America for you. It’s all on show. It’s not trying to hide it from you.

And that’s what makes America great.

From strength to strength. 

JG

Covid still has us under the thumb… That’s good and bad.

I’m starting to feel there’s a bit of confusion or some wishful-thinking in the way most people are reporting where we’re at with Covid.

Now, I’m probably talking market analysts more than the mainstream media here, since I read more market reports than I do newspapers.

But a lot of analysts seem to be talking like Covid is a done deal. That we’ll get a vaccine in a few months and job done. Hang a banner off a battle cruiser.

But it’s not looking like that to me at all. First, Covid is on the back foot, but it’s not out of the fight yet. Second, the damage to the global economy has been pretty brutal, and those scars won’t heal over night.

Let me show you what I mean.

First, the UK outbreak continues to look a bit scary to me. The numbers of infection and deaths is pretty ugly, and heading in exactly the wrong direction:

But it’s Covid’s ability to mutate and throw an entire economy off the rails in a matter of weeks that’s really scary.

And maybe a vaccine helps here, but if Covid keeps mutating, how long before it mutates beyond the reach of our vaccines? (That’s a technical question and it might have a simple answer, but I don’t know what it is and I’m pretty sure most economists don’t either.)

And this renewed outbreak in the UK (and China too I might add), is happening in an economy already punch-drunk on the first wave.

Take a look at global GDP. It’s down about 8 or 9%. Our major trading partners are down over 5%. That’s a depression-like contraction in output.

And large chunks of the world are still in lockdown. This is Goldman Sach’s “Effective Lockdown Index” which shows how much of the world is still in lockdown.

China is doing best, but still 10% of its economy is in lockdown. The rest of the world is worst (Australia is probably better), and some regions are going in the wrong direction. (Come back, Western Europe, come back!)

Like the RBA above, Goldman reckons Covid is still dragging the economy down about 9%…

The US is holding up, perhaps surprisingly well, but GDP is down a colossal 20% in the UK and Western Europe.

So I don’t know. I’m generally not a glass-half-empty kinda guy, but there’s not a lot to get excited about here.

This is a picture of a world still pinned down under the thumb of a virus. I don’t know how much hope we should be putting in untested vaccines, but even if they’re wonderfully effective, there’s a lot of healing that will need to be done.

I certainly don’t think we’re at the stage of looking through things to the post-Covid world, which is what a lot of economists seem to be doing.

Now, this is both a good and a bad thing, depending on how you look at it.

It is bad for our general way of life. It’s a pain, and the economy is going to take a long time to recover.

Perversely though, it’s probably a good thing for asset prices, as floods of easy money keep gushing into the system.

Take a look at the American Financial Conditions Index. It’s the easiest financial conditions ever.

That will light a fire under asset prices.

Let’s hope there’s enough of us left to enjoy it.

JG

No B.S Friday: What really happened in America… (I reckon)

So Trump’s downfall was as fascinating as his rise. I’m going to show what the death blow actually was, and why it was so easy to march a mob into the American capital.  

Oh, but yeah. This is the first blog of the year, so I guess I should start with something to mark that.

So, have a great year everyone. Believe in yourself. Pull the finger out. Make the most of the opportunities etc.

I’ll come back to that Friday, but I wanted to jump in to this because if I’m honest, I’m not thinking about anything else right now. It’s just fascinating.

Ok, so this story starts with a puzzle: why was a rag-tag mob of protestors able to waltz right into the parliament of the most powerful nation on earth?

How does that happen? There is literally a military unit devoted to keeping the congress safe? They didn’t anticipate that they’re might be trouble at a protest that has been telegraphed for weeks?

No. It doesn’t add up.

Business Insider says that this is proof that it was an actual coup attempt. They quote someone in charge of similar operations in Europe who said, “We train alongside the US federal law enforcement to handle these very matters, and it’s obvious that large parts of any successful plan were just ignored.”

Right? To me, it’s just not tenable that it should ever have been that easy.

So, was Trump actually trying to execute a coup?

I don’t believe that for a minute.

First, you don’t try and seize the reins of power by marching an unruly mob into parliament. That’s just not how the game works and Trump would have known that.

Second, if marching a mob into parliament actually was part of the play book, where was the follow up act? In particular, where was the tightly-managed media strategy that Trump has become famous for?

No, it was clear that Trump had nothing. He was surprised as anyone.

And to me, it looks like Trump got played.

Like a boss.

I reckon Trump expected the protestors to simply get turned back at the gates – like every other sane person on the planet.

And to me, I don’t think the coup was ever Trump’s end game. I don’t even think he’s serious about hanging on to power.

Look at it through a business lens. He was positioning his brand and cultivating his followership. That’s why he had to fight the idea that he ‘lost’ the election.

 If you ‘lose’ the election, then it’s off to retirement you go. However, if the election is stolen from you, then you become the ‘king in exile’, and the only choice for nomination in four year’s time.

And so that’s what Trump’s game has been. Build up the stolen election narrative to hang on to his relevance.

And it was working. It was working well.

But then Trump became responsible for marching a mob on parliament – the ‘coup’, the ‘riot’, the ‘insurrection’ or whatever the media latched on to.

Once that happened. The optics became terrible.

Remember, Trump is an optics-driven strategist. I know first-hand. It’s something that happens to you when you manage a marketing department. You become focused on the optics.

And remember during the Black Lives Matter protest where he posed outside of a church waving a bible?

Incredible optics. To his fearful Christian conservative base, it was a signature moment. In the midst of chaos, he was to be an anchor of faith.

But then this happened:

Yup, that’s a bare-chested figure with horns sitting on the throne, flexing his biceps.

(For the record, that’s a self-declared ‘hyper-dimensional being’ called the Q-shaman. Yep. “Shaman.”)

This was now Trump’s America. He was not the hero defending the little old church under siege. He was the one ushering the barbarians and the hordes of darkness in through the gates. And they looked like this:

You’ve seen the photos.

Fearful America was not happy.

Trump tried to put some distance between himself and the scene that night, but it was way too late. Like, they’re literally wearing your hat with your name on it. How much distance could you ever possibly get?

And so I think this is the end of Trump. His base won’t desert him, but for moderate Republicans he’ll be remembered as the dickhead-in-chief who almost led a pack of dickheads (optically speaking) over the wall of American democracy.

And I’ve got to think it’s an inside job. I’ve got to think that there was someone on the inside who undermined the defences of Congress enough to let that mob in – who knew that once they were in, they were unruly and ugly enough to create some terrible visuals.

Just leave the cameras rolling.

And this is why it’s such a boss move. It hit Trump where it hurt. Right in the optics.

For four years, Trump has dominated this side of the game.

But this week, he got his MAGA hat handed to him.

Wow. I hope the rest of 2021 is going to be as fascinating as the first six days.

JG.

The worst fears for the construction industry won’t come to pass. In fact, all their Christmases have come at once.

One of the interesting things about the way that this year has panned out, is that much of it was not as expected.

That’s not surprising. It’s been a pretty crazy year. But it tells you just how hard it is to forecast forward with all that much accuracy in times like these.

I’m particularly thinking here about the outlook for construction.

When Covid first broke it looked like it was going to be a bit brutal for the construction industry. There was a demand-side hit as credit froze and people bunkered. There was also a supply-side hit as there were major disruptions to the construction supply chain. 

Putting those together, people were expecting construction to fall to some of the lowest levels in history. This chart here shows the Housing Industry Association’s (HIAs) forecast, which had commencements falling 58% from their 2018 peak.

But all of this was before the HomeBuilder incentives.

And those incentives seem to have done their job.

Data from the Australian Treasury shows that nearly 500 applications for the federal government’s HomeBuilder grant were approved each week in November!

It’s a huge ramp up. It was less than 20 per week in July.

The Treasury now expects 40,000 applications for the grant to be submitted by the end of December, well above the initial forecast of just 27,000.

From The Australian:

Figures obtained by The Australian show uptake of the government subsidy has already exceeded the initial Treasury estimate of 27,000 by December 31, and is expected to hit 40,000 — 50 per cent higher than forecast — by the end of the year…

Treasury officials did not anticipate the number of first and new home buyers that applied for the first round of $25,000 grants to underwrite the construction of new homes or major renovations.

According to the Treasury data, the number of grants being approved has risen from less than 20 a week in the first month to almost 500 a week in November…

Australian Bureau of Statistics data released on Thursday showed a 65 per cent increase in the value of new home loan construction commitments between July and October compared with the same quarter last year.

The rise in construction finance commitments is unprecedented. Take a look at the boing-boing in this chart here:

As detached house dwelling approvals launched to a 20-year high in October:

There’s a question here about to what extent the grants are just incentivising and ‘pulling forward’ construction that was going to happen anyway.

We’ll know in March – when the scheme is slated to end (although we’ve heard that before).

It is possible that there’ll be a gap in demand once the scheme ends.

But that doesn’t mean it wasn’t a good thing. This was exactly the idea. A temporary measure to get us over a temporary lull in demand.

And it seems to have done a stellar job of that indeed.

How good is this government?

JG

We’re going to wake up in January are realise the property market has been booming for months

Ok, how did that work out for us? 2020 I mean…

The year is almost done. For a while there it was looking hairy. Some economists were talking about prices falls north of 30%.

That looks a bit silly in hindsight, doesn’t it?

But I can understand it. Things were scary. It felt like the wheels were totally coming off.

At any rate, as 2020 comes to a close, it’s starting to look like the property market has come through 2020 practically unscathed.

Nationally, prices are down less than 3%.

Amazing.

How did we do it?

Well lower interest rates certainly helped. As did the mortgage deferrals that stopped a rush of panic sales onto the market.

Those things helped the market keep its head.

And at the end of the day, the property market rode on the coat-tails of the broader economy, which held up much better than most people expected.

And that meant that what happened in your property market really depended on what was happening in your local economy.

Consider the capital city breakdown.

You can see that when it comes to price falls, it’s really a story for Melbourne and Sydney.

Prices were essentially flat in Perth, while they were actually up a decent amount in Brisbane and Adelaide.

(Not a bad outcome given it was the middle of a pandemic.)

Melbourne was obviously impacted by the lockdown, and Sydney was the city most exposed to a slowdown in immigration and overseas student numbers.

And given Sydney and Melbourne account for 60% of the Australian population, and 70% of the housing stock by value, falls there dragged the national averages down.

But the national average actually disguises what’s going on, on the ground. Because really, outside of Sydney and Melbourne city areas, our property markets are all picking up.

Take a look at this chart here, which looks at the distribution of price growth across our capital city and regional areas.

It shows you that price falls have been largely contained to the capital cities, while price gains have been largely concentrated in regional areas (with Brisbane being a bit of an exception.)

So what that tells me is that if you can look through the lockdown in Melbourne, and through the collapse in immigration and student numbers in Sydney, our underlying property market is actually already starting to heat up.

It’s the same story when you compare units and houses. A lot has been made of the fall in rents in our capital cities, but when you break it down, you can see its almost entirely a unit story.

Rents for detached houses are actually up 1.5%!

Again, the apartment market is concentrated in Sydney and Melbourne, and some blocks are entirely dedicated to student accommodation.

So this is consistent.

But the story that emerges for me is that our underlying property market has already turned the corner, and is starting to heat up.

Sydney and Melbourne are lagging the country, and that’s helping to hide what’s really going on.

But if you look through it, the government support packages and record low interest rates are doing their job.

And the property market enters 2021 with a full head of steam.

JG

The story of how property dodged a bullet

I remember in the early days of Covid, some economists were predicting property prices to be smashed.

I think it was even CBA who were talking about falls of 30-40%.

Well, that didn’t happen. Right now, prices are down about 5% in Sydney and Melbourne, and that’s as bad as it gets. Nationally, they’re down just 1.7%!

You’d have to think that’s a pretty impressive result, right? The biggest disruption to the market in 100 years, and all it costs you is a few percentage points of growth.

Meh. Whatever.

And look, I’ll be honest. I never thought we’d see prices fall 30% – not in a prolonged way. I thought we might see a bit of panic selling and prices dip pretty sharply in the short-term, but we didn’t even get that.

So how did we do it? With the benefit of hindsight, how did the property market make it through unscathed.

This is the questions that Eliza Owen at CoreLogic was asking herself the other day.

Basically, she reckons there’s three reasons.

The first is, not surprisingly, super-cheap money.

The cost of borrowing money is probably one of the most important factors influencing property values. Over 2020, the RBA have reduced the official cash rate target (which influences lending rates) by 65 basis points, to 0.1%.

In a bid to stimulate economic activity, the reduced cash rate has lowered bank funding costs, leading to record low mortgage rates. This relationship has held up historically, with RBA research previously suggesting that a 100 basis point reduction in the cash rate can lead to an 8% increase in property values over the following two years.

I think you probably have to add in money-printing at this stage here, but this is right. Nothing influences property prices like the price of money.

The second thing that saved us what a systematic program of mortgage deferrals, which stopped any forced sales going to market.

In the case of large-scale mortgage debt, ongoing arrears can lead to forced sales, which in turn fuel risks associated with higher supply in the housing market, lowers values, and higher rates of negative equity, where the borrower sells their property for less than what they owe the bank.

Mortgage repayment deferrals have acted as a temporary stopper on this vicious cycle. Those that did not want to sell amid economic uncertainty due to an inability to repay their mortgage, did not have to. This may have contributed to very low levels of stock throughout 2020, which only reduced further amid stage 2 restrictions from March. The low level of stock on market likely helped to insulate dwelling values during this time.

That chart on the number of listings is pretty telling. The market will end up having one of its quietest years on record.

The final reason Owen points to is the fact that this downturn was actually different. It wasn’t wide-spread. It was concentrated in certain sectors.

A third, important factor that may have insulated parts of the housing market is the specific nature of the economic downturn. Severe job loss across hospitality, tourism and the arts resulted from the purposeful slowdown of ‘social consumption’.

The chart above shows that those working in food and accommodation and arts and recreation, have seen devastating job loss through the pandemic. However, those working in this industry are less likely to have mortgage debt.

The decline of employment in these sectors likely contributed to severe pockets of rental income decline, but the investor servicing debt may be able to hold on to the asset while it is temporarily vacant.

So basically, most of the brunt of Covid’s economic impact were borne by renters, and the home-buying segment got through relatively unscathed.

Put it together, and you’ve got to pay credit where credit’s due. The government response, both on the monetary and fiscal side, helped the Australian economy get through this pretty well, and Australia’s property market rode along on the economy’s coat tails.

Good result, chaps. Good result.

JG