You’re going to hear a lot more about the bond market in the coming year.

If Albert Edwards at Societe General is right, the bond market might be about to blow up the world!!

Ok, Edwards is a perma-bear. He tends to always advocate for the worst-case scenario. But, I’m interested in the worst case scenario. It helps me get a sense of where we’re at.

So Edwards argument is that bond yields are rising everywhere. Bond yields are the prices governments pay for their debt. So rising yields are risky because it means that governments are paying more for their debt, and if they go too high, then governments go broke.

That’s a headache if it happens in Greece. It’s a nightmare if it happens in the US. But the yield on 30-year US Treasuries is now above 5% – a once unthinkable figure.

The rest of the world is pushing higher too. Britain’s 30-year borrowing cost has hit 5.5%, its highest since 1998. Germany’s, at 3.1%, is within touching distance of its dearest since the euro zone’s debt crisis in the early 2010s. In intraday trading on May 21st, the yield on Japanese 30-year government bonds rose to nearly 3.2%, setting a new record.

People think this reflects domestic factors – inflation (investors demand higher yields to preserve their real returns), and risk of default – if you look at US government debt projections, across a 200-year time line, current projections do look a tad ridiculous. Last year the US spent more on interest payments than defence. It’s only getting worse.

But Edwards reckons the real action is in Japan.

Inflation in Japan is now higher than in the US and Europe – the first time in decades that that has happened.

That means that Japan is going to have to start unwinding its quantitative easing.

Japan cranked up the money printer in 2012, and went pretty crazy with it really. Whereas the Fed’s balance sheet (a measure of how much money is in the system) peaked at 35% of GDP, the Bank of Japan’s balance sheet peaked at 140% of GDP!

That was fine when Japan was fighting deflation, but now inflation is back, that’s going to have to be unwound.

That is, Japan is going to have to start pulling money from the system.

That has big implications.

Edwards argues that the galoshes of Japanese money flowing around the world did two things. First, it helped inflate the US stock market bubble, by just buying everything.

Second, it kept US Treasury yields suppressed by buying heaps of them. (The US government didn’t have to offer competitive yields because the Japanese would buy at any price.)

So if the Bank of Japan starts sucking money from the system, global share prices will come under pressure, at the same time as yields across the world begin to rise.

The price of debt in the US, and everywhere really, will start to rise.

Which then starts to create all sorts of feedback loops – if the price of debt goes up, corporate earnings start to fall because interest payments are higher, which re-rates share prices.

That could easily get ugly.

No one can tell you how it’s going to play out. Edwards is giving us the worst-case scenario here.

But the vibe in markets is that bond yields are starting to make everyone nervous.

This is not the last we’ve heard of it.

JG.

The rate cut this week will set the balls rolling

I reckon that the rate cut this week is going to get the ball slowly rolling on the property market.

And by the end of the year the momentum is going to be unstoppable.

Ok, I know I’m getting a little ahead of myself, but I’ll be shocked if the RBA doesn’t cut rates this week.

Shocked and outraged.

The RBA is already late to the party. And they can hide behind the chaos of Trump’s tariff war – and look it is a tough time to be predicant the course of anything, let alone inflation.

But we needed a rate cut six months ago. Uncertainty isn’t enough of an excuse.

So unless something goes very pear-shaped, we’ll get a cut this week.

And at least two more this year, but I reckon it will be more.

So far the property market has been treading water, but two of the three spectres of uncertainty have gone back in their hole (the third is tariffs, and who knows what’s happening there).

The first spectre was the rate cycle. There was real fear in the market, I reckon, that rates could actually kick higher.

So when we got our first cut, and then when we get this week’s cut, that will cement the perception that the rates cycle has turned, and people will be able to buy with a bit more certainty about where they stand.

The second spectre of uncertainty was the election, but with Labor’s decisive win, that has completely evaporated. There isn’t even the prospect of a hung parliament hanging over the market’s head.

And Labor’s housing policies are all very price positive. The expansion of the Help to Buy Scheme, and the 5% First Home Buyer scheme will add a lot of heat to the bottom of the market – into the more affordable segments of the market.

At the same time, their proposed tax on super balances over $3m, could potentially see a lot of wealthier folks diverting cash out of super and into property.

And that could potentially juice the top end of town.

So, the bottom is getting cash. The top is getting cash. The middle will just have to content itself with 3 or 4 rate cuts.

The point is that with two spectres of uncertainty back in the grave, and a lot of cash being driven into the market, I think it’s only a matter of time before people cotton-on to the fact that a boom is being born.

All the analysts are on the same page with it. Most are looking at 10%+ price growth over the next twelve months.

The experts have agreed.

Now we’re just waiting for the rest of the market to catch up.

I reckon this week’s rate cut will be the cut that does it.

JG.

No B.S Friday: Get the excavator out

I saw someone the other day say that life comes down to two things:

1. Knowing how to get what you want

2. Knowing what’s worth wanting

I think that’s overstating it. It’s more like 1.1 things. Maybe 1.2.

The first is just strategy. It’s just a technical question.

If you know you want to retire by 50, and you’re really clear on that, everything that follows is just a question of logistics.

Sure, it’s still hard. We’re not schooled in the systems we need. Kids can tell you how to calculate the mitochondria of a circle, but can’t tell you what leverage is, or the difference between bad debt and productive debt.

But it’s just a matter of finding the right system for the task – a process of trial and error – and then applying the system to the problem at hand – a question of logistics.

It’s not rocket science. I’m living proof that anyone can handle the logistics.

You can do it too.

But the real challenge in life is knowing what you want.

This is the deep work. This is the digging at your soul with an excavator work.

And it’s the only game in town.

It sounds like it should be easy, but there’s two things that get in the way here.

The first is conditioning.

Most of what we want we’ve been taught to want.

This can be gross (do you really crave insanely sweet soda, or did you grow up in an environment where you were constantly bombarded with the most persuasive content money could buy, telling you that that’s what you wanted?)

Or it can be subtle. Flashy cars and trophy wives are symbols of success. A woman’s default colour preference is pink. In this house we support Collingwood.

It goes on. Being a doctor or a dentist is a ‘good’ job. You want to live on the “right” side of the river. The ideal partner looks like this person from the toothpaste commercial.

Unless we examine our desires ourselves, we inherit a set of default preferences – preferences inherited from society, family, advertising execs and TikTok influencers.

Which is why I think you see so many people nail the picture-perfect life – right wife in the right car, kids in the right school – and still be miserable.

You have to find out what you really want.

And I think the only way to do that is through experimentation. You need to step away from your inherited desires and let yourself be pulled towards other things.

You won’t get it first go. If you have a vague urge to explore your creative side, you need to play with it to see if your calling is to painting, sculpture, food, or blogs on property economics and success.

You just have to give it a go.

But once you do that – once you get some clarity on what it is that lights you up, after you’ve liberated yourself from inherited ideas of what someone should want – the rest is easy.

The rest is just logistics.

JG.

It’s not hard to see global growth booming

The consensus view is that this is shaping up as a tough year for global growth.

Trump’s trade war is already shaking the outlook from its tree, even though we’ve got no idea where things are going to end up. Trump’s trade war could be called off tomorrow, but even then, the sheer uncertainty that’s been introduced into markets since the start of the year is going to have its toll.

And so right now economists are falling over themselves to downgrade their growth outlooks. Many people are even saying that a global recession is possible.

You see it in markets. Band of America’s fund manager survey reports that far more fund managers expect the economy to be weaker this year, than stronger. On past correlations, that’s bad news for share prices.

And you see it in official economist circles. The IMF’s latest growth forecasts saw strong downward revisions across the globe, with some big falls pencilled in for Mexico, the US and China. Australian growth got dialled back a bit, but not too much.

But could it be wrong?

It’s one of these things where I feel like the narrative has maybe run ahead of the facts a little.

And we’re probably over-emphasising the trade war – because it’s splashy and headline-grabbing – and underestimating the impact of economic fundamentals.

Like the rates outlook.

Interest rates are now falling the world over. This isn’t because central banks are afraid of what the trade war might bring. It’s because the war against inflation has been won.

The average interest rate in advanced economies has already fallen 100bps. We’ll probably get another 100bps over the next twelve months.

So yes, the trade war is big – or it could be big. (It could also be nothing.)

But 200bps of rate cuts is going to have a big effect on growth.

When you put rates against global manufacturing activity, it tells you that we should be looking for a big pick up in economic output any day now.

That is definitely not the consensus view.

But the consensus view has its eyes on the trade war and almost nothing else.

And yes, the growth outlook in the US is clearly tanking. And the standard wisdom goes that you can’t have decent economic growth while the US is in recession.

But the US is facing some very specific headwinds – e.g. fiscal tightening from DOGE cuts, tariff impacts, collapse in tourism numbers (and other US product boycotts), and adverse confidence effects from uncertainty and market volatility (making it hard for businesses to plan or expand vs just battening down the hatches).

No other countries are facing conditions like this. In fact, as the US economy withdraws inwards, other countries are ramping up their trade negotiations – like the UK-India trade deal this week.

So while the consensus view is that the global economy is tilting towards recession, it’s not the only possibly scenario.

It’s also possible, that the world goes boom.

It’s also possible that the world goes boom while the US alone goes bust.

It’s entirely possible.

JG.

The real battle over tariffs is bigger than you think

Whats the point of tariffs anyway?

The thing about Trump is that he just looks like an idiot somehow. It’s just so easy to believe that he has no idea what he’s doing and he’s just throwing random policy ideas at a wall and seeing what sticks.

But Trump is not an idiot. There might be good reasons to hate Trump (I can think of a few), but idiocy is not one of them.

(Part of me actually wonders if this aura of stupidity is a deliberate ploy. Trump’s opponents consistently underestimate him. Even though he has single-handedly reshaped the Republican party and won the Presidency twice, people still say he’s a moron. There are significant strategic advantages that come when your enemies can’t actually see you.)

And you see the same narrative playing out around tariffs.

American tariff policy seems to be cast as just a massive dummy spit by someone longing for the good old days when people had good jobs in good factories. And then racism goes the rest of the way to explaining why Trump hates China so much.

And I’m sure some people in Trump’s team might think like this. But I doubt that Trump does.

And so what is Trump thinking?

Well, at its heart, there’s two pretty solid motivations. (We might still argue about whether traiffs are the right tool for the job, but that’s another question.)

The first is making sure American workers are not left behind. In the first decade or so of the new millenium, corporate America went on an off-shoring binge. It started with unsophisticated manufacturing (sneakers) but sophisticated manufacturing (i-phones) soon followed.

This happened with such vicious speed, that labour was left behind. Entire towns became unemployed, deaths of despair (sucicided and substance abuse) spiked, and people were angry.

Tariffs are about re-shoring this industry and giving people their jobs back. Again, tariffs might not be the best solution, but this is the motivation, and I can’t say it’s a bad one.

The second motivation is strategic. A nation that doesn’t have control over its defence manufacturing is necessarily vulnerable. America dominated WWII because it had a massive industrial base that it could pivot into a war machine.

That’s no longer the case.

And if all your weapon systems require computer chips, and China controls all the computer chips, you’re pants-down waving your bum in the air.

So I think the motivations are solid.

But I’m not sure tariffs – punishing people for selling you cheap stuff – is going to be the answer.

There are economic reasons why nations de-industrialise. It’s a pretty common path actually. In the early days of economic development, people leave their farms for the factories, and manufacturing employment rises.

But after a time, the economy pivots towards services, and manufacturing employment falls.

(Ironically, this is exactly what China is trying to engineer right now!)

But the catch here is wages. You can’t replace a Chinese worker, earning $2/hr, with an American worker earning even just $20/hr, without creating a massive lift in your cost base.

Which is why some analysts are saying that an Iphone could end up costing $3500.

The success of tariff policy then really depends on whether you can convince consumers to shell out more for everything they buy.

It’s a tough sell.

Not to say it’s a bad idea. “Acess to cheap stuff” is not the best metric of a successful society. “Everyone having jobs” and “Being able to defend yourself in a war” are much better measures.

But people do like their cheap gadjets.

And so to my mind, tariff policy needs to be supported by some massive social engineering – a program to convince people that paying more for stuff is a price worth paying.

That’s a huge effort.

And I doubt America can do it.

Americans are not famous for their selflessness.

But this is where the real battle over tariffs is. It’s a culture war. And Trump’s political fortunes will swing on this war, above all others.

JG.

He was so close to being PM

Latest polls are pointing to a Labor win this weekend. Some are even pointing to a landslide.

Dutton must be wondering what the hell happened.

Only a few months ago Dutton looked like he was cruising to victory. Labor was on the nose, and the voting public was in the mood for a change.

And then Trump unleashed the crazy.

And like a trainwreck, or a marvel movie, either way, you can’t take your eyes of it.

It’s just so out-of-the-box. So unprecedented. So wild.

And most people only have so many minutes in the day for politics. And so do you spend those minutes picking apart the party-political approaches to reducing the cost-escalation in the NDIS?

Or do you spend it on the American Defence Secretary accidentally copying the editor of a major newspaper into top-secret plans to bomb an enemy nation?

It’s no contest.

And if we’re honest, I don’t think people really draw a distinction between American politics and Australian politics. I reckon more than a few people are going to be surprised that Trump is not on the ballot papers this Saturday.

At any rate, people started watching the crazy unfold, and started to get a little uncomfortable with how it was playing out.

Third biggest single-day fall in the American stock market since WWII does not speak to stability and uncertainty.

The mood for change evaporated.

On top of that, Dutton’s decision to let himself be aligned with Trump in the public’s eye in the early days came back to bite him.

It made sense at the end of last year, when Trump was galvanising a certain flavour of public opinion, and he had the aura of a champion.

Dutton’s polling got a Trump bump.

But it’s now gone horribly pear-shaped.

People are freaking out, and they want to lean against the Trump crazy, not go with it.

In its simplest terms, a vote for Dutton has become a vote for more Trump crazy. (That’s unfair of course, but nothing in politics is fair.)

And now it looks like he’s going to lose.

(Not, I might add, that Labor has done a single damn thing to deserve this victory.)

The exact same story is playing out in Canada. A few months ago, the government’s primary vote had fallen to an all-time low of just 18%. It was going to be a wipe out.

The Conservative Party tried to tap the mood, and went with the slogan “Canada First”.

Then Trump said that he would like to annex Canada, and the Conservative vote has been smashed. Current polling has the government set to win what only a few months ago was a completely unwinnable election.

Wild.

Trump’s win energised conservative parties around the world in its early days. But now it’s doing the opposite.

(Although that could change if Trump puts a lid on the crazy and gets a few wins under his belt.)

But the thing to note here is that global politics, and American politics in particular, is now having a massive influence on domestic politics.

Going forwards, all parties are going to have to campaign with this in mind.

But god knows how they’re going to do that in an era of Trump.

JG.

Let’s get back to basics

With share markets all over the place this week, I’ve been getting a lot of questions about the Trump tariffs and what they mean.

I’ve talked about it a bit recently (like and subscribe if you’re new to the channel!) but let’s start at the ground floor and work our way up.

In this piece I’m going to look at the following:

• What are Tariffs?
• What’s the Economic logic?
• What are the economic impacts – US, World, Aus?
• What’s the impact on the share market
• Impact on Australia’s property market?
• Where does it go from here?

Easy right? Here goes.

What are Tariffs?

Tariffs are a tax paid by a company that imports something from somewhere. So if I’m an American reseller, and I pay $10 for a widget from China, and there’s a tariff of 10%, I pay $1 to the American government.

The key thing to clear up here is that the foreign country doesn’t pay the tariff. The Chinese government doesn’t pay it. What it means that the I now have to add an extra $1 to my sales price to recoup the tariff, which reduces the Chinese product’s competitiveness relative to domestic alternatives.

What’s the Economic logic?

There’s two things that I see going on here. The first is the text-book logic for tariffs. A lot of American manufacturing was “off-shored” to China and other places in the 90s and 2000s. As those industrial sectors closed down, it created a lot of job-loss and economic disadvantage. In what came to be called “Rust Belt” America, unemployment rose substantially, and with it deaths of despair – suicide and substance abuse.

Trump’s promise to these communities was that he was going to bring industry back home. This is part of the reason why he now owns the working class vote – a voting block that was typically Democrat.

Tariffs is part of the strategy for bringing industry back. Tariffs give domestic industries a pricing advantage, and encourages “American made.”

That’s the theory anyway.

The second factor here is that I think Trump recognises that America is home to the most valuable consumer market in the world. He’s decided to make it pay-to-play. Which is why we are facing tariffs here in Australia, even though we buy more from the US than we sell to them.

What are the economic impacts – US, World, Aus?

Team trump have said they are willing to bear the pain of this tariff-led readjustment. That pain will take the form of higher prices – as businesses past the cost of the tariffs on to their customers – and lower global growth – since lower trade should probably mean less specialisation, and less production. In the short run at least.

Australia’s exports to the US are relatively small, so that shouldn’t have a direct impact. But there are substantial tariffs on China, Korea, Japan, etc, so we could see reduced demand from our key export markets.

There’s no story here where this is a positive for economic growth anywhere in the short run.

What’s the impact on the share market

There’s two things going on here. The first is that people have been saying for a while that global markets, and particularly the American market, have been looking a bit bubbly. The recent run up as almost entirely been driven by the AI narrative, and that narrative had already started to look a bit leaky – e.g when China launched their own, much-cheaper, large language model.

So there was already a sense that the market was getting nervous. The Trump tariffs seem to have been the pin the market was waiting for, and so a fair bit of the action, in my mind, comes down to a fairly necessary correction.

That said, if inflation persists, and global growth slows, then that will have an impact on earnings, which should down-rate share prices on its own. So that’s in play as well. How all that comes out in the wash is anybody’s guess. If share prices fell another 20% on reduced earnings, that would be consistent with historical experience. But maybe they don’t fall at all either. That could happen too.

Impact on Australia’s property market?

With a reduced global growth outlook, markets have already gone from pricing 3 rate cuts this year to 4. Some economists are even saying we could get 50bips in May. That could happen.

If that does, property will get a rocket under it.

The only thing about that narrative is that it assumes inflation remains on its current trajectory. It is possible, if trade from China to the US freezes up entirely, that China will be looking to dump its good somewhere else. We could find ourselves inundated with cheap Chinese stuff, (and Vietnamese, and Korean, and Indonesian… etc.)

To the extent that that’s deflationary (cheaper prices), that might put the RBA in less of a rush to cut.

Where does it go from here?

This is seriously anybody’s guess. But one thing I’d note is that Trump is an expert in the negotiation technique of ‘anchoring.’

So if I tell you something normally costs $100, but you can have it for $10, you naturally think you’re getting a bargain, because I’ve anchored your expectations to $100.

Similarly, if Trump tells China they’re paying tariffs of 104%, and then it gets walked back to 30% through negotiations, China will feel like they’ve got a good deal, even though they’re now paying an extra 30%.

All to say, Trump’s opening claim is almost always an ambit one. It wouldn’t surprise me that if in six months the tariff story is only half as bad as it looks right now.

Sharing is caring

If you’ve found this useful, please share it around. I know a lot of people are confused about this right now.

JG.

Hard to argue with this maths…

It’s one of the things about economists – sometimes their job is to just point out the obvious.

Old ABC economic grey-beard Alan Kohler was dropping some truth-bombs the other day when he unpacked what’s going on with the housing crisis.

I’d love to say that this is some complex rocket-science kind of stuff. But it’s kindergarten-level math.

That doesn’t make it wrong though.

So first up, he looked at what’s happening to supply. As he rightly notes, “We know that dwelling approvals have been in trend decline for 10 years”.

Yep, and even that’s a pig with lipstick on it. That’s just the raw numbers. Given the population is trending upwards, that series should be trending upwards as well. But it’s not.

Which is what makes it such an abysmal result.

Anyway, that’s the supply side.

On the demand side – the old bedfellow of supply – Kohler notes things are trending the other way:

“We also know that population growth has been climbing for 20 years driven by a doubling and then tripling of migration”.

Yep, John Howard opened the gates, and every government since has enjoyed the sugar hit of stronger immigration.

So supply trending down, demand trending up. And that’s why the shortage gets worse every year.

If you’ve been following my work for a while none of this will be new to you.

But what Kohler did was look at it at the monthly level to try get a sense of just how quickly things are going to poop.

These back-of-the-envelope calculations are a little alarming.

On the demand side, Kohler estimates that net overseas migration, plus natural increase, created a population demand of 57,000. Divide this number by 2.5 – the average occupancy rate – and this gives demand for an additional 23,000 dwellings.

On the supply side, there were 10,903 dwellings approved for construction in January 2024, assuming it takes one year to build a home.

(That’s actually generous, since we know not all approvals go on to be completions, and some approvals are for knock down and rebuilds.)

Anyway, when you put these two together, Kohler estimates that there was a housing shortfall of around 12,000 dwellings in January 2025. “Demand was more than twice supply”, says Kohler.

That’s 12,000 homes short, in a single month!

If that’s a typical month, and I reckon it probably is, then the housing shortage in Australia is getting worse at a pace of 12,000 homes a month!

Every month.

In a year, that’s 144,000 homes.

This is supposed to be going the other way. We should be building more homes than we need each month if we want to make the housing shortage better.

But we’re not. We’re going the other way. At an alarming clip!

This is why prices go higher, year after year after year.

It’s not rocket science.

JG.