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Exposed: Banks’ secret against rate cuts

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The banks don’t want you to enjoy lower rates.

One of the things about being trained in the dark-arts of marketing like I am, is that you recognise a publicity campaign when you see one.

They happen all the time. Most of them just slip under the radar. They subtly slip into the collective consciousness, and just become fact.

“Women need to eat more meat, because iron,” for example. 

Anyway, one of these clandestine campaigns came up on my radar the other day. While most people were celebrating last week’s rate cut, The Australian Financial Review was not loving it.

In fact, it started running a bunch of articles about how we didn’t really need rate cuts, and in fact, rate cuts weren’t good for us anyway.

Like this little nugget from Morgan Stanley’s James Gorman:

Morgan Stanley chief executive James Gorman has warned central banks that further cuts to official interest rates risk reducing their “firepower” to deal with an unforseen geopolitical crisis.

After Reserve Bank of Australia governor Philip Lowe suggested the official cash rate could fall to 1 per cent and US Federal Reserve chairman Jay Powell indicated US rates could move lower amid fears escalating trade tensions will hit the US economy, Mr Gorman described monetary policy as unpredictable and limited in its impact.

Won’t somebody think of the unforseen factors?

Or there was former RBA Deputy Governor Stephen Grenville:

Former Reserve Bank of Australia deputy governor Stephen Grenville has challenged the effectiveness of the RBA’s inflation target and interest rate cut, as he warned that cheap borrowing costs distort housing and stockmarkets.

Following the historic reduction in the RBA’s cash rate to a record-low 1.25 per cent on Tuesday, Dr Grenville writes in The Australian Financial Review today that negative real (inflation adjusted) interest rates “don’t make much sense” and fiscal policy should play a larger role to stimulate the economy.

Yeah, kinda. Fiscal policy (government spending) could definitely be doing a bit more heavy lifting, but that’s hardly news.

And there was a raft of others, none of them any more insightful or persuasive than these.

And so when you see a string of weak arguments for something, all supposedly unrelated, but adding together to give the impression of a broad consensus, then you know you’re in a clandestine publicity campaign.

But I’m like, why? Who doesn’t love rate cuts?

So I did a bit of digging. And you know who doesn’t love rate cuts?

The Banks.

Turns out that when interest rates get super-low, the banks have much less flexibility to manage their money, and that starts cutting into their profit margins.

That’s what the analysts at Goldman Sachs reckon:

…if the cash rate was to fall below 1.50%, every additional rate cut thereafter would shave about 5 bp off sector margins. The sensitivity of margins to falling rates accelerates once the cash rate falls below 1.50% because the various levers the banks have at their disposal become less flexible as the cash rate approaches zero and we would particularly highlight the following:

So banks don’t like rate cuts because the lower rates go, the more it binds their hands, and the less profit they can make.

And so what do you do? You use your mouth piece (The Australian Financial Review) to start campaigning against rate cuts…

… no matter what the country needs, no matter what the economy needs, and no matter what the property market or individual borrowers need.

Nope. It’s bank profits and everyone else be damned.

That Royal Commission sure was money well spent, wasn’t it?

JG

Bears go bananas. Must be a good sign for the market.

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The property-doomsayers are getting hysterical. That’s always an interesting signal.

I’m actually ready to call the bottom on this market.

The declines are coming to an end. The market is about to turn.

And what data am I basing this bold prediction on? None. I don’t actually have any evidence.

But it does appear to me that we have hit peak crazy, and that’s got to be a market signal for something.

I’m talking about ‘news’ headlines like this one: Property ‘Armageddon’: House prices could fall by 50 per cent.

Yup. They’re going all in with this one.

With Sydney and Melbourne’s falling house prices infecting other capitals such as Brisbane, Darwin and Perth, some doomsayers say property prices could slump by as much as 50 per cent by 2022.

Digital Finance Analytics chief Martin North says Sydney and Melbourne houses will suffer price falls of 20 to 30 per cent, while high-rise units could slide by up to 50 per cent from their peak prices in 2017.

North says prices in Melbourne, parts of Brisbane, Perth and Sydney will fall the most between now and 2022, but it is outer suburbs that will be hit with the largest price falls.

“Prices will unwind in Sydney and Melbourne for at least another three years,” he says. “The problem is a lot of the high level data is averaged and averaging tells you nothing at all. Prices are not dropping by the same rates everywhere.

“In some places, for example western Sydney, prices are 23 to 25 per cent down or more, but areas closer into the city, particularly houses, are probably only 3 to 5 per cent down.

“If you look at Newcastle or the Illawarra, it’s 7.5 per cent down but there are other areas out in those regions where prices that have hardly moved at all.

“Perth is down 15 to 18 per cent on average. And if you look at Darwin, it could be 25 to 28 per cent. So these are big movements, they really are.”

Economist former government adviser John Adams — who once worked for Liberal senator Arthur Sinodinos — believes economic armageddon is coming.

Adams says Melbourne’s falling house prices are in a devastating slide that will go beyond Moody’s forecasts and could reach more than 40 per cent from peak to trough.

Meh.

I’ve heard all this before. North has been trotting the same numbers out for about six months now.

And I think the bears are getting more excited and shrill because the data does seem to be turning.

The pace of declines in the big capitals is getting slower, not faster.

And that’s because, despite the headline falls, most things have been running in the property market’s favour in recent months.

  • The Hayne Royal Commission wound up and was a lot better for banks than a lot of people were expecting. Financial sector funding costs had blown out to 60bps above the cash rate in anticipation of the worst, but are now back down to a 24bps premium.
  • At the same time, some banks are cutting their retail rates, so funding costs are down overall.
  • The APRA restrictions caused a bit of logjam in the mortgage market as everyone tried to get themselves up to speed. That seems to be clearing now, and the market has found its feet.
  • The RBA has clearly moved to an easing bias, and rate cuts seem likely in 2H2019.
  • And the election should give things a bit of certainty, and the market a bit of a bump, as it normally does.

Add to that some property bears screaming at their coming irrelevance, and I think you have the making of a bottom.

Too soon?

The budget is a lie!

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This economic revolution is playing out in real time. Today, they attack the budget.

The budget is built on a lie. Everything we know about the budget is wrong. Every number Josh Frydenburg laid out for us on Tuesday misses the point.

That’s the word from MMT – modern monetary theory.

Ok, so we’re picking up from last week and the week before. I’ve been explaining that the ideological dam has broken. People now realise that the tools we have for managing the economy just don’t work the way we expected them to work.

Quantitative Easing (QE aka printing crap-cans of money) should have created inflation. It didn’t.

So we need a new theory for understanding the economy, and with any new theory comes a new set of tools.

And as I said last week, Munters (my name for MMT proponents) believe that:

  • Capacity constraints, not money, create inflation;
  • Interest rates are a useless policy tool if there’s no demand (looking at you RBA); and
  • Governments are not constrained in the way we thought they were.

The second point there potentially kills off monetary policy and the RBA’s agenda completely, but point three could be a complete game changer.

And budget night will never be the same again.

The key point the Munters make is that the way we’ve been trained to think about the government budget is wrong. It’s the wrong metaphor.

The metaphor we’ve been trained to use is to think of governments as a household. Households can’t live beyond their means, so neither can governments. Households have to balance their budgets, and so do governments. If households are saving money (earning more than they spend) that’s a sign of good money management. The same is true for governments.

All of this is simplistic in the extreme, but Munters are also keen to point out that it’s actually wrong too.

It’s wrong for two reasons:

1. Governments can print money

If a nation is ‘monetarily sovereign’ (it has a flexible exchange rate and issues debts in its own currency), then are no hard constraints on how much money it can print. It might create inflation that way, or it might devalue the currency, but both of these things can be managed, and depend a lot on what else is happening in the local and global economy.

As Munters argue, inflation only comes from capacity constraints, not automatically out of money creation – as QE has proved.

A household obviously cannot print money to pay its debts. If I tried to pay my creditors in JonCoins, I’d probably end up in jail.

Munters argue that given this important difference, it makes almost no sense to compare governments to households.

2. Governments are not in the business of making money

Munters also argue that it’s not helpful to have a government that is motivated like a household (maximising its own wealth) or a business (maximising profits.)

Here the idea of ‘sectoral balances’ comes in. This is just the accounting identity that if the government sector is in surplus then it is lending money to the other sectors in the economy. That necessarily means that the other sectors must be a net borrower, and must be in debt.

So a government that forces itself into surplus, forces households and business into debt.

Is that a great outcome?

And if point one above is true, it’s much worse for households and businesses to be in debt since they can’t print money to pay off their debts.

So while it might be nice at the individual level for governments to be running a surplus, taking the economy as a whole, it’s not clear that a wealth-maximising government is that great a thing.

Not a Free-for-all

This is not to say that Munters think it is a free-for-all and that governments can do whatever they want. It is only to say that governments are not constrained in the way we thought they were – in the way that the ridiculous governments-as-a-household metaphor would have us believe.

And that means that there is a much greater role for governments to print money and support demand than we previously believed.

This idea runs totally against the prevailing economic wisdom.

But the prevailing economic wisdom has failed.

And MMT is an idea who’s time has come.

I’m not arguing it one way or the other. I don’t have a horse in this race. But I can see the writing on the wall. Momentum is with the Munters.

And the implications are going to be huge.

More on that next week.

Negative Gearing Reckoning: who will it hurt?

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If Labor wins, negative gearing reform is go. But who is it going to hurt?

Labor has announced that their negative gearing and capital gains tax reforms will come into effect on January 1, 2020.

Like most people, I was expecting them to go for the end of the 19/20 financial year, so this means two things:

  1. there’s going to be a rip-the-bandage off approach, and I think that’s probably a good thing.
  2. Labor knows it’s onto a vote-winner and is happy to double-down.

But like all things in politics, there must be winners and losers, so who is going to be worse off under the new policy settings?

Well, literally everyone, according to the Real Estate Institute of Australia:

“The REIA has always been concerned with the impact the policy would have on housing markets, buyers, renters and economic activity,” REIA President Adrian Kelly said.

“This concern is magnified in the current market.

“There is almost truck loads of analysis and reports showing the adverse impacts of the policy on mum and dad investors, home owners, renters, the construction industry, state governments and the economy.

Investors, home-owners AND renters?

How does that even work? I actually struggle to think of a scenario where all three are made worse off under ANY policy proposal – maybe something like “All housing will be nationalised and turned into jumping castles for Swedish tourists.”

Or are we using a definition of “worse-off” that I’m not aware of?

I want to pick this apart a bit, not to be cruel to REIA, but to make a point about how the housing market actually fits together. I think it will be useful.

Anyway, if we’re saying everyone in the market is going to be worse off, then I assume we’re saying that house prices are going to fall (bad for investors and owner-occupiers) and rents are going to rise (bad for renters).

That’s the only scenario that makes sense. If rents fell, that’d be bad for investors, but you’d have to chalk that up as a win for renters.

Likewise, if houses became more expensive that would be bad for renters looking to buy, but would be a win for owner-occupiers and investors.

So we’re talking about falling house prices (though I know a café full of millenials cheering that on), and rising rents. But how would negatively gearing actually make rents go up?

They might go up if the reforms exacerbated our housing shortage, but since negative gearing will remain in place for new stock, it’s hard to see how removing it for existing homes will have any affect on construction rates…

But, just for arguments sake, let’s imagine that somehow negative gearing reform does increase rents.

What happens then?

The point to remember here is that since housing is an asset, like all financial assets, the return is linked to the price.

The link between the rental return and property prices is captured by “yield”.

Now the thing to note about property yields is that they’re affected by structural conditions in the market – interest rates, risk appetites etc. Yields are not determined by rents and prices themselves.

That may sound counter-intuitive, given that yields are a calculation of prices and rents, but the causation actually runs the other way. Yields determine prices.

If you track yields over recent years, you’ll see that they’ve been very stable.

For 15 years, they’ve barely deviated from 4%. Even though rents and prices have been all over the shop, yields have barely changed.

So if rents go up, what happens to yields?

Well, you’d think yields would go up as well. But that doesn’t happen, because prices are set by people buying property, and the people buying property are happy with yields of 4%, on average.

So if rents go up, yields stay constant, and the adjustment is forced on to prices. Prices go up and yields remain at 4%.

Statistically, that’s been true for as long as we have data for.

But if prices go up, isn’t that a win for owner-occupiers and investors?

Yes.

Personally, I think the reforms will have no impact on rents, and push prices down at the margin, but not by a huge amount. Yields will adjust a little because the ‘cost of carry’ appetite will have changed (I’ll talk more about that another time).

But all this ‘everyone is worse off’ is just BS.

But remember this. If you want to know what’s happening to prices, look to rents and yields first.

Heads up! This is a ‘seismic shift’ in the global economy

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There’s some big shifts going on in the way we understand how the economy works. The playing field is about to get turned on its head.

Let’s pick up where we left off last week. As I was saying, we’re on the brink of seismic shift in the economy. It’s going to be huge. Mark my words. In 18 months I’ll be digging this up and telling I told you so.

Anyway, our understanding of what the economy is and how it works is about to change. And the drive for this change is coming from a massive failure.

It comes from the massive failure of money printing (Quantitative Easing) following the GFC to juice the economy and to create any inflation at all.

It comes from the massive failure of central bankers to predict that first failure, or even to come up with a plausible story with the benefit of hindsight.

And it comes from the massive failure of policy makers to stop the tidal wave of money they unleashed ending up in the pockets of the ultra-wealthy.

Big fat ‘F’ for failure.

This has sort of been obvious for a while now, but it now feels like there’s a shift in the collective consciousness. Maybe it’s those catchy milestones. We’ve now had ten years of money printing in the US and Europe, and 20 years in Japan – to most reasonable people, ten years seems like a fair amount of time to let an experiment run before you call it off.

And that’s where we’re at now.

And central bankers and orthodox economists are still scratching their heads. Policy makers are at a loss. Everyone’s wondering what the hell is going on.

Now enter MMT.

Take note of that acronym. You’re going to be hearing a lot more about it.

MMT stands for Modern Monetary Theory. From what I can gather it’s a pretty broad church. MMT proponents (I’m going to call them Munters from now on) tend to be more of your ‘soft hearted economist’ version, though people will point out that MMT is just an analytical framework. What policies you want to throw into that framework are up to you.

Anyway, MMT has actually been around for a while, but the Munters are now in a position to claim that the QE experiment that’s been running since the GFC proves that their lens for viewing the world is the clearest lens on offer.

They’re giving us three observations (that seem important to me):

1. Inflation comes from capacity constraints, not money.

The old view of the world said that all money-printing results in inflation, but QE showed us this is not the case.

Munters say that inflation comes from capacity constraints – when demand for goods and services outstrips labour and capital’s ability to produce those goods and services. Money doesn’t necessarily come into it.

QE failed because it did nothing to address this demand-supply balance.

2. Interest rates are impotent if there’s no demand.

QE was the end game in a doctrine where interest rates were seen as the primary tool for managing the economy. Lower interest rates means people borrow more and do more economicy stuff like spend and consume.

And QE was very effective at lowering the price of money and creating the (ongoing) era of super-cheap money. However if firms have nothing worthwhile to invest in, then it doesn’t matter how cheap money is. And if consumers feel like they’re over-leveraged already (which they were following the GFC), then you do literally have to pay them to borrow money.

So lower rates do nothing, which is kind of what they did.

And so this is where the QE transmission broke down. All that money didn’t make its way into the real economy where it might have been able to generate inflation. Rather, it got caught up in the financial sector, where it simply bid up the price of financial assets (including real estate).

3. If money printing doesn’t create inflation, then governments are not constrained in the way that we thought they were.

We used to think printing money was a pure evil. Munters say that we now know that’s not the case. It’s more nuanced than that.

However if that’s true, then governments are not constrained in the way we thought they were. It may be possible for governments to print money, to consume and invest, all in a way that doesn’t lead to an outbreak of inflation.

This is a game-changer.

The New Rules

I think you can probably get a sense of how this could fundamentally recalibrate the economy.

It’s going to be massive. But I’ll go in to that, and the quirky politics of it all, next week.

Wages caught in a ‘pincer movement’ will push property higher

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Wages have been slow to rise… but that could be about to change.

There are two forces converging on the outlook for wages, both set to push Aussie earnings higher.

This has been one of the puzzles of recent years. The economy has been strong, unemployment has been low… so why haven’t wages been growing more quickly?

Actually, why haven’t they been growing at all? On the whole, wages have been flat for a few years now.

This is important for the property outlook. It’s income that determines serviceability, and it’s serviceability that determines house prices.

And personally, I’ve been waiting for this piston to fire for a while now.

Anyway, there’s two big trends forming that might finally put the spark in the chamber.

The first is that you can only keep pressure on a pressure cooker for so long. My guess is that workers have been made timid buy the increasing casualization of the workforce (record numbers of people are holding down two jobs), and high levels of immigration, which adds a lot of people to the labour pool, many of whom are coming from a relatively weak bargaining position.

These factors have made workers on the whole less aggressive than they might otherwise have been.

But there’s a sense that workers might be waking up to the economic reality.

That’s the RBA’s sense of it. They reckon the market is totally ignoring the risk of a break out of wage inflation. From the AFR:

Reserve Bank assistant governor Chris Kent says bond markets are underestimating the risk of wages growth stoking higher inflation, as long-term Australian bond rates fall towards historically low levels.

Dr Kent said low bond rates that did not compensate investors for the risk of inflation were not only an “Australian phenomenon”.

“What we have had here is a gradual pick-up in inflation while unemployment rates have moved to quite low levels in NSW and Victoria,” he said.

It may be true that the RBA is just ‘jawboning’ the market here – trying to talk up the prospect of inflation – but even if that is true, having such a prominent institution saying that workers should go harder is probably going to have some effect.

“Rise up Comrades!”

The other force here is the prospect of a Federal Labor Government.

Credit Suisse were warning last week that a Shorten government could result in ‘cascading’ wage increases. From The Canberra Times:

“We believe the ALP’s package of employment and industrial relations policy reform would represent a transformative shift in the bargaining power of labour in Australia with cascading implications across the whole of the listed market”…

“Our assessment of ALP’s policies indicates a potentially transformative shift in the bargaining power of labour, leading to a rise in the labour share of GDP over and above cyclical dynamics and cascading impacts across corporate Australia”…

The policy changes will lead to wages growth that will particularly impact on construction support services, hospitality, healthcare, agriculture and retail…

Federal Labor has pledged to restore penalty rates for some workers, crack down on sham contracting and labour hire regulation to ensure those workers are paid the same as directly employed staff doing the same job…

I mean, you could probably put that in the folder of “Well, duh” economic analysis, since Shorten and co. are being pretty explicitly about increasing the lot of workers. But still, it’s not to be ignored.

And put these two together, with workers being cheered on by both the RBA and by the Federal Government, then you’ve have something close to a perfect storm.

And that’s the thing about a wages break out – it can happen pretty quickly. Once one industry scores some big wage gains, neighbouring sectors in the economy will pretty quickly start to want their share too.

And as the wage pulse spreads through the economy, house prices will drive higher as a result.

Not now, and not this year given the lags on these things. But by 2020… maybe.

One Bank Breaks Ranks With New Boom Mortgage

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ANZ is issuing ten-year IO mortgages… What does it mean?

So ANZ has broken ranks with the big four, and is aggressively targeting investors with a new ‘boom mortgage’.

That’s not what they’re calling it obviously. To them it’s just an interest-only mortgages with a ten-year interest only period.

But to me, that says ‘boom!’

From the SMH:

ANZ Banking Group is loosening some of the clamps it put on interest-only mortgage lending in 2017, after pledging to reopen the door to property investors following a period of excessive caution.

The big four lender on Thursday said it would again start offering customers an interest-only period of up to 10 years, up from five years now. It will also allow interest-only loans where a customer has a deposit of 10 per cent of a property's value, where previously it required a 20 per cent deposit.

The changes are a clear signal the bank is trying to spur growth in the housing investor market, where interest-only loans are most popular, after chief executive Shayne Elliott last month admitted it had been “overly conservative”.

It is also the latest sign of a loosening in restrictions on investor and interest-only loan growth, after the Australian Prudential Regulation Authority (APRA) late last year removed caps on these types of mortgages.

“On recent review, we have made a decision to increase our focus on the investor market. The upcoming changes demonstrate our continued appetite in the investor market, whilst ensuring we remain in line with our APRA requirements,” ANZ said.

Latest Reserve Bank figures show housing investor credit growth was just 1 per cent in the year to January. ANZ last month said its housing investor loan book shrank 3.8 per cent in 2018.

The remainder of the big-four already offer IO mortgages with a 10% deposit, so that’s not a huge change. But 10-year interest only periods… that’s pretty aggressive.

I did look into it, and it’s not going to be available to everyone. They’re going to be assessed at a minimum floor rate of 8.25%, which is a very high hurdle to cross. They’re marketed only for high-income professionals with stable jobs.

Still, it’s an interesting change in direction.

Over the past year or so, we haven’t seen any news that has pointed to a looser credit environment. It’s all been about how much tougher credit conditions have been getting.

So this is a real break in direction.

It signals that either

  1. APRA is now willing to back off a bit; or
  2. The banks have stopped caring what APRA thinks

Both are bullish signs for the market.

And if the market recalibrates so that ten-year interest only mortgages are the norm, that will give prices a boost. It increases the amount that people are able to borrow and service, and increases in borrowing capacity mean increases in prices.

So something has shifted here. There’s a break in the weather. A change in the wind.

It’s not exactly clear what it is, but either way it’s a big boost to the market.

Yellow Brick Road becomes collateral damage

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It’s getting a bit murderous out there… but is it really as bad as it seems?

Some big names are becoming collateral damage in the property market’s turn lower.

With sale volumes down and credit harder to secure, we might be looking at the end of some big household names.

Last week it was celebrity millionaire Mark Bouris’ Yellow Brick Road, which reported a $34m loss:

“It is now particularly hard for mortgage originators and brokers to assist borrowers to obtain an approved home loan,” Mr Bouris said in a statement.

“In all the years of being involved in the home loan business, I have never seen such difficult borrowing conditions. These factors have caused an adverse impact to our new lending, particularly in the December quarter,” he said.

“The whole regulated environment for home loans has tightened, particularly around credit approval processes. Every borrower is impacted, but self-employed, small business owners, and older borrowers are finding it particularly tough to get a loan,” he said.

…The AFR suspects Bouris’ tale of woe may be partly prompted by the need to justify the company’s $34 million half-year loss, overwhelmingly caused by a writedown of Yellow Brick Road’s goodwill in the lending and wealth divisions, from $24 million to precisely $0.

If you track YBR’s share price, it’s been on a slow-bleed down since a peak in mid-2014.

However, YBR has taken another leg-down recently, after the Hayne Royal Commission tore shrapnel holes in the entire mortgage broking industry. Mortgage Choice (yellow line) and AFG (red line) have also taken a bruising this year.

But we can’t really claim to be surprised. APRA and Hayne have ushered in one of the tightest credit environments in recent memory. It was always going to be an attack on the mortgage broking business model.

At the same time, real estate agents are also doing it tough in the light of a down-turn in sales.

Remember, real estate agents are much more sensitive to a downturn in sale volumes than they are to a downturn in prices.

The McGrath Agency is the poster boy for this. A few weeks ago they released their FH19 results, which delivered an 18% crash in revenue and an EBITDA loss of $2.5 million:

Their share price is now down 88% since the float in late 2015, with investors strapped in to a one-way ticket south.

Looks like John McGrath cashed out of the business at exactly the right time. Well played, sir.

Anyway, even though price declines have so far been relatively modest, the hits to big names like McGrath and Yellow Brick Road give us the impression that there really is blood on the streets.

But the point I would make is that both of these guys, and most of the big property names we’re familiar with, are volumes business.  

And over the past couple of years they geared up to manage the huge volumes of trade that were pumping through the system in the boom.

When volumes returned to normal levels (which was inevitable, but did happen quicker than most people were expecting), they were always going to be left with excess capacity.

But you can’t shed capacity the way you turn off a tap. It takes time to figure out the right organisational size, recalibrate your systems etc.

So in the adjustment phase, you’re always going to have to cop some pain.

And that’s what we’re seeing right now.

And so it’s easy to sell a doomsday story here if you want to.

But so far, everything we’re seeing seems pretty orderly to me.

Economy is crapped-out, but that’s not the real story

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Yesterday’s data showed that the economy wasn’t doing great… but there’s a bigger picture here.

Yesterday, the economy turned a momentous corner.

And not momentous in a good way.

The headline from the Sydney Morning Herald says it all:

AUSTRALIA FALLS INTO PER-CAPITA RECESSION

A “per capita recession”? What even is that? We’ve never heard that before.

Basically it’s economic growth once you strip out the impact of population growth. So if it wasn’t for population growth, and immigration in particular, our economy would be going backwards.

We’ve never bothered to do that before. But now all the papers are doing it. This is a new world.

Australia's economy has slumped into a per-capita recession for the first time since 2006, leaving the country relying on population growth to propel its economy and creating a political hurdle for the Coalition.

The Morrison government has pledged to reduce the migration rate but figures released on Wednesday show that without migrants fuelling consumption, Australia's economic growth would be going backwards.

The Australian Bureau of Statistics data shows the economy grew by 2.3 per cent over the year and 0.2 per cent in the December quarter – below market expectations and well short of Reserve Bank forecasts of 0.6 per cent.

The budget forecast of 3 per cent growth for 2018-19 and the mid-year economic update's revision to 2.75 per cent will struggle to be met, putting a strain on preparations less than a month out from Treasurer Josh Frydenberg's first budget.

The fact that a major paper is leading its reporting of the GDP figures with a comment on immigration shows just what a hot-button topic it is.

And people might be right to wonder why we’re still importing record levels if immigrants when our economy is actually going backwards. People might start to wonder at the sense of that.

Spineless politicians on both sides might look to duck that whole issue and focus on the headline numbers, but there’s not much joy there either.

The headline number was positive, but much weaker than people were expecting, and much weaker than the RBA had been forecasting.

That makes the prospect of rate cuts more likely.

When you break it down by components, you see that growth has been driven by public spending, which was the best performing component.

But that’s not great. It’s saying that if the government wasn’t spending away, the economy would probably be going backwards. You can’t have a government-dependent economy… not for long anyway.

That sounds ok, but when you remember that inflation was 1.8%, it means that in real terms, wages fell by 0.3%.

The figures also showed that average compensation per employee (a fancy term for wages) rose just 1.5% in 2018.

Put all that together, and you don’t have a pretty picture.

Wages are going backwards, on a per-person basis we’re already in recession, and if it wasn’t for immigration and government spending, our economy would be stuffed.

This is not the pre-election snap-shot Scott Morrison was hoping for, I can tell you that.

The Anti Rate-Hike Indicator You Should Know About

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All bets are off now. Rate hikes are a thing of the past. What the heck happened?

Take a look at this chart here. This is a story of a hundred broken promises.

Over the past six or seven years, the markets have continually over-estimated the trajectory of interest rates. They expected them to be a lot higher than they actually ended up being.

And you can understand why. Because for all that time, the RBA was saying that the next move in interest rates would be up. They were saying that they would like to ‘normalise’ interest rates from their historically low levels, and they’ll be doing that just as soon as they possibly can.

The markets took them at their word…

… and everyone was wrong.

Now, things have become interesting. Markets are actually expecting lower interest rates.

It started when the RBA gave up trying to sell the world on rate hikes and admitted that, actually, the next move in interest rates might not be up. Maybe things are about right where they are, and it’s a coin-toss as to which way the next move in rates is going to be.

That led to most market economists downgrading their expectations as well. This week, Westpac’s Bill Evans broke ranks and said he now believes the next move in rates will be down.

The curious thing here is why anyone thought interest rates would be going up in the first place. When you look at inflation (the metric that the RBA is supposed to care most about) – it’s barely making it into the RBA’s target band.

There’s hardly a case for rate hikes there.

Probably where they got the idea that rate hikes would be going up is this chart here. This is employment growth vs the RBA’s cash rate.

As you can see, historically, they’ve moved pretty closely together. When jobs growth is strong, interest rates rise, and when it’s weak, they fall.

For twenty odd years that rule of thumb served us pretty well.

But around 2013 it started to break down. Jobs growth was strong – going great guns actually – but interest rates were stuck to the floor.

And to be fair, most economists were thinking it would have to happen sooner or later. Strong jobs growth would feed into stronger wages growth, which would turn into stronger inflation numbers.

But it just didn’t happen.

And I reckon the key to understanding why that transmission mechanism broke down is this chart here. This is the part-time employment share across the anglo-sphere.

What it shows is that a lot of jobs in Australia are part-time. It’s 32% here – almost one in three. It’s just 20% in New Zealand.

So while jobs growth has been strong, we’re not adding full time jobs. More and more we’re creating part-time jobs.

And the thing about part-time work is that it tends to be a bit precarious by nature. If you’re only on a part-time contract, you’re not in a position to be hustling for higher wages.

And so the growing share of part time employment helps us understand why wages growth has been so underwhelming.

… which in turn helps us understand why inflation outcomes have been so soft.

… which in turn helps us understand why the promised rate hikes just never materialised.

I think a lot of economist in the market and at the RBA thought that this would just sort itself out.

But now, they’ve collectively given up on it.

The wages boom isn’t coming. Rate hikes are off. This is the new reality.