The RBA decided to keep the cash rate on hold for another month at 2.75%, not that we expected them to do anything different but what we would like to know is have you seen any change in your personal spending capacity?
MARKETS
Whether or not you agree with him is irrelevant but you have to admit, Greg Canavan always gets you thinking...
Big Trouble in the
Australian Economy....Everybody Relax
By +Greg Canavan •
June 4th, 2013 View
the original article here
In the movie Big Trouble in Little China there’s a
classic line by the ‘hero’ of the show, Jack Burton. The group he’s leading is
in a panic as they’re getting away from the bad guys. But Jack reassures them
in a swaggering drawl… ‘Everybody relax, I’m here.’
Yesterday, Atlanta Fed president Dennis Lockhart did his
best impression of Jack Burton. In a Bloomberg television interview
he said,
‘There certainly seems to be an acute fixation on the timing
of any adjustment to the asset purchase program and I guess I would just
encourage everyone to not lose sight of the bigger picture.
‘Any adjustment is not a major policy shift. The high level
of accommodation will stay in place.’
There you go…everybody relax, the Fed’s here.
Or maybe just the Atlanta Fed. Because before that, San
Francisco Fed President John Williams said an improving US economy would allow
the Fed to pare back its purchases of bonds in the coming months.
This has all got beyond ridiculous. These Fed muppets have
absolutely no idea what they are doing. They are desperately trying to placate
markets while pretending to be committed to price stability and withdrawing
record stimulus.
Our friend Jim Rickards summed it up best in a recent tweet.
‘After two years of “risk on, risk off”, we now have “taper on, taper off”.
Madness. There are no markets left, just puppet shows by the Fed.’
It wasn’t long before poor economic data turned the market
from taper on to taper off. Because soon after the various Fed verbal acrobatics,
we got news that US manufacturing contracted in May. The widely watched
Institute of Supply Management’s gauge of manufacturing in the US fell to a
four year low of 49, down from 50.7 in April. Any reading below 50 signals
contraction.
But who needs manufacturing and the production of real stuff
when you have the Fed?
Well, China could do with a bit more of it. After the
‘official’ reading came out over the weekend showing modest expansion, the HSBC
reading out yesterday showed a manufacturing contraction. There’s a dilemma for
you…do you believe the Chinese government or a bank? Either way, it shows China
is struggling.
And you’d think Australia's economy could do with
a little more manufacturing activity too. Our index came in at 43.8 in May, marking
the 23rd consecutive month of contraction. While it was a better reading than
the depression-like conditions of April (where the index had a reading of 36.7)
our makers of ‘things’ are still clearly hurting.
That hasn’t been an issue for the past 20 months or so
because we’ve had the mining boom to cushion the impact. But now that is going,
going, gone.
So what does the Australian economy rely on to
drive growth now? The RBA hopes that lower interest rates will lead to another
boom in housing and consumption. Phil
Anderson argues it doesn’t really matter…the stars are aligned to give
housing another 14-year bull run.
Phil makes a convincing argument, but we’re sceptical. Then
again our scepticism comes from taking note of the ‘fundamentals’, those quaint
little bits and pieces of data that are meant to provide the foundation (or
otherwise) for asset price movements. And they don’t seem to matter anymore.
Although RP data did report a 1.2% fall in Aussie house prices during
May. Just a blip, we’re sure…
Anyway, we’ll see just how concerned the RBA is about the Australian economy at
2.30 today when it announces its interest rate decision. The consensus is that
it will remain on hold. We have no idea what they’ll do. We can only tell you
that rates will probably be a lot lower in six months’ time.
Because we doubt a new consumer or home construction boom
will take up the slack of the slowing
mining boom. So the RBA will have no choice but to resort to the same
playbook that every other central bank in the developed world is resorting to.
That is, cut interest rates and
pray.
But Australia has one disadvantage in this game. We’re a
peripheral economy and a large debtor nation. That is, we don’t have the same
ability as the US, Japan, or even the UK to cut interest rates to the bone and
still be able to attract foreign capital to fund our $800 billion-odd debt
pile.
Yes we can cut interest rates, but that will send the dollar
lower, which will eventually feed through to higher inflation, which will
force interest rates back up. Keep in mind that although the higher dollar has
hurt manufacturing and many other parts of the Aussie economy in recent years,
it has enabled interest rates to remain very low and provided an added benefit
for our foreign creditors to keep providing credit (that is, a currency
windfall).
The strong Australian dollar has
kept a lid on imported inflation…so even though domestic prices seemingly rise
every other day, import prices have ‘deflated’ keeping the overall price level
stable (that’s if you buy a mass-produced electronic item with your shopping
every week).
A weakening dollar will slowly (it takes a while to flow
through into the economy) seep into higher imported inflation…and combined with
higher domestic inflation, you’ll eventually see rising prices play havoc with
the RBA’s ability to blow another bubble…somewhere, anywhere.
But that’s probably a story for 2014. Exchange rate effects
take time to flow through to consumer prices and you have to take into account
the fact that companies might absorb or pass on higher costs emanating from a
weaker dollar.
For now, it’s fair to say that Australia is between a rock
and a hard place. Slowly but surely, the vice is tightening.
But don’t worry. Channel your inner Micawber. Something will
come up.
Everybody relax…
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That should do it for another week folks. Until the next time...
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