Well, you should be.
If not, then please let me know what you are on, because I want some, too!
There are so many conflicting reports these days – often from the same source.
And often within hours of each other.
We’re currently standing in the middle of a minefield, where one wrong step could destroy the entire global economy.
And there seems to be no shortage of potential mines, including the US presidential election; the prospect of the Fed hiking interest rates in December; a second euro banking crisis, this time with Deutsche Bank; a massive Chinese real estate bubble that echoes the subprime crisis and Italy’s bad loan nightmare continues unabated.
Closer to home, we have UBS warning that Sydney housing is a big bubble risk.
One in 14 mortgage holders have negative equity.
Aussies are drowning in debt.
Then, on the other hand:
Almost everywhere you look, someone is warning about a crash.
The media warn you about market volatility almost every day.
Heck, most ads in e-letters these days preach pre-apocalyptic doom.
But when you look at the statistics, it has been eight years since the last major stock market crash; house prices have risen – in some places, very strongly – and thanks to lower interest rates, there is heaps of money on the sidelines.
The major banks are reporting that their average mortgage holder is years ahead of their payments.
Surplus, here we come!
Our debt levels are manageable.
Who do you trust?
How do we best gauge what is going on?
More importantly, what lies ahead?
Well, in uncertain times, one truism comes through – the simple things in life are often the best.
Another good dictum is – “Forget what people say, it’s what they do that counts”.
There are very few reliable forward indicators of the Australian economy.
GDP should really be titled Gross Deceptive Product.
Many of us, especially those practising economics (it is called the dismal science, after all), keep getting it wrong – a trend which is surely only going to escalate as the world’s future gets even more murky.
So, it is with a sigh of relief when one finds another trustworthy bellwether.
This week, in fact, we have two!
The first one – summarised in charts 1 and 2 below – is a much better measure, in my humble opinion, of what is happening economically on the ground than, say, GDP.
It shows that we have less money to spend on things.
And this is despite falling interest rates and record low inflation.
Importantly, our first two charts are based on a per capita basis.
This follows on from our recent theme, questioning the ‘growth for growth’s sake’ mindset.
Our charts are also in real terms, so they take inflation into account.
If you want to get a bead on what’s going on economically, then look for a chart or statistics that refer to real net disposable income per capita.
Now, when it comes economic forecasting, nobody does it better than a Kiwi!
In this case, I am referring to net migration flows from Australia back to New Zealand. Remember, it’s what people do that counts.
Our third chart this week suggests that Kiwi migration back home is a good lead indicator of the Australian economy.
Unfortunately for Australia, this indicator is pointing towards harder economic times ahead.
The previous times when Kiwi migration from Australia was at current levels, Australia was in recession.
I like to call this bellwether – Kiwi Canary.
We previously released this data on Melbourne Cup day last year.
Despite the witty title – and what we think is a great name for a thoroughbred – that Missive had the lowest open rate for yonks.
Head in the sand?
Well, maybe all three.
Anyway, it is worth a revisit.
Other trusted bellwethers include the yield curve (10 year bonds minus 90 day bank bills), when it comes to forecasting interest rates.
And despite the new honcho’s stance – at the time of writing (being late last week) – it’s showing a strong easing bias.
Hours actually worked is a better measure of employment these days. We outlined this a month or so back as well.
In coming weeks, we will report on three accurate housing bellwethers – the good time to buy a dwelling index by the Westpac-Melbourne Institute; changes in housing finance and annual wage growth – these all provide a steadfast projection of the housing market’s future shape.
All I know, for sure, is that things aren’t that simple anymore.
Bellwethers help, but the dynamics appear to be changing and with them, the past property rules will have to change, too.
Let’s touch on a few:
- Will interest rates fall further? Yes, most likely, but there’s not much left to wring out of the interest rate cloth. Yet, lower rates will make debt even more affordable.
- In a world of very competitive labour costs – and an increasing uptake of automation and artificial intelligence across all sectors of the economy – how are wages going to outpace these market forces, so that households can continue to afford the things we have grown accustomed to and importantly, finance high (and higher) debt levels? Good luck working that out.
- Will retiring boomers – faced with lower returns, the prospect of working into their 70s, lower pension receipts and much longer life expectancies – suddenly go a spending binge? I doubt it.
- Will Gen X and Y – weighed down by housing debt, HECS fees, the prospect of higher taxes, less full-time work and less pay – replicate the boomer consumption model? Very unlikely.
- And on top of these macros, people are angry and they’re starting to revolt against the establishment that got us to where we are today.
As a summary, we believe that anyone digging in their heels to protect past property mentalities may be in for a big surprise.
Oh, and before I forget, here is another relevant maxim – “The future isn’t what it used to be”.
Hence the ??? on our charts.