That’d be right. We planned to kick today’s Daily Reckoning off on a positive note, a fact that probably doesn’t surprise you given that we are always trying to highlight the good stuff that goes on in the Australian and global economy.
But then global markets tanked overnight, thwarting our plans. Our market is down heavily today too and gold — which used to be a recognised safe haven, but then wasn’t, and now is again — is at its highest level in about six months. And while the main US equity indices dropped sharply, gold stocks popped higher.
So we’ll make a compromise and do both. A little bit of good and a little bit of bad…
But first, a quick announcement about our fast approaching World War D conference. We’ve got a new speaker on board. Richard Duncan, author of the international best seller The Dollar Crisis and the 2012 follow-up, The New Depression, the breakdown of the paper money economy, will be taking to the podium.
The crux of Duncan’s argument is that if credit growth in the US slows to 2% or less, the system will crumble. In other word’s it can’t cope with deleveraging. Credit (debt) must continue expanding, otherwise the system ceases to exist in its current form.
When US households began their massive deleveraging following the housing bust, the government had to step in with massive spending to prop up the system. After slowing down mid-way through 2013, according to the latest Fed ‘Flow of Funds’ report, Federal government debt grew at an 11.1% pace in the fourth quarter of last year, the highest level of growth since the start of 2012.
It will be interesting to hear Duncan’s thoughts on how the US is looking now, five years after the credit crisis. Especially considering that the Federal government remains the primary source of US credit creation. And the rest of the world, for years the financier to the US government, has sharply reduced its appetite for US debt over the past 12 months.
There are still a few seats left for the conference. If you want to hear Richard Duncan speak alongside Mark Faber, Jim Rickards, John Robb, Satyajit Das and others, click here.
Ok, let’s do the good news first…followed by the bad news, because that was the order of things over the past 24 hours.
Aussie employment data released yesterday showing a massive 47,300 job surge in February got the bulls in a lather, calling for higher interest rates and for the dollar to jump back towards parity with the US dollar. But a sampling change by the ABS ‘contributed around 37% of the increase in total employment during the month,’ according to the Financial Review.
Still, the data reflects an improvement in the job market, and is certainly good news. But there’s no point evaluating the February jobs data in isolation, which is what a lot of economists seem to do with each data release.
If you plug the data into a framework and analyse it from there, you can take a more measured approach.
As we discussed earlier this week, in our view the massive interest rate cuts by the RBA over 2012 and early 2013 have done a very good job in buffering the Australian economy from a falling terms of trade and drop off in mining investment (the worst of which is yet to come).
Interest rate sensitive sectors of the Australian economy have all done well and as employment is a lagging indicator, you’re seeing some of that starting to flow through now. If you look at the trend rate of growth in the chart below, you’ll see that total employment has been picking up since flattening out in mid-2013.
Trend employment growing nicely
The message is that interest rates are doing their job. The other message is that interest rates are about to ‘down tools’. There’s not much stimulus left in the pipeline. Australia’s economy has grown dependent on easy money. It needs constant injections to keep the party going. When the RBA’s rate cutting stimulus wears off around mid-year, you’ll hear cries for more cuts.
The other thing to note about the chart is that total employment hasn’t gone backwards, despite the handwringing about job losses and the demise of manufacturing.
That’s because of immigration. Net migration into Australia is around record levels. In the year to January, a net 380,000 people entered the country on a long term basis. This is well above the long term average of around 150,000. But since 2004, the average has been closer to 300,000 per annum.
When you have an addition to your population like this on an annual basis, it creates quite of bit of economic growth. People need housing, food, clothing etc. So with this in mind, it should come as no surprise that both Coles and Woolworths have announced plans to expand their supermarket networks considerably this year, which combined will create over 20,000 new jobs. More good news!
This near record high immigration is another reason why Australia’s economic growth has defied predictions of an Australian recession. But with more people with which to share the spoils, on a per capita basis the growth story isn’t so rosy.
For example, in the year to December the headline measure of economic activity showed growth of 2.8%. But on a per capita basis, the growth was just 1%. A better measure of growth is ‘real net national disposable income’, which incorporates the effect of price changes on the economy (example, falling iron ore prices). In the 12 months to December it grew just 1.8%. But on a per capita basis, it didn’t grow at all. That news is not so good…
With an additional 300,000–400,000 people coming into the country each year, we better be creating jobs. Otherwise the unemployment rate will increase, and that’s exactly what’s been happening recently.
So much for the good news…
The bad news is that China’s economy continues to show signs of a slowdown. Data out yesterday afternoon revealed industrial production, retail sales and fixed asset investment all slowed year-on-year much more than expected in February.
And at his annual press conference in Beijing yesterday, Chinese Premier Li Keqiang admitted more bond defaults were likely and played down the prospect of another stimulus package. ‘We are going to declare war against our own inefficient and unsustainable model of growth and way of life,’ Li said.
No wonder markets didn’t like it.
We know we said this was bad news…but it’s actually good news. A more efficient and market oriented China will be good for the world economy (and especially Australia) in the long run. In the short term…not so good.
To go from a crazy credit growth, invest and build anything type mentality to something more market oriented will require a painful adjustment. Hopefully, China’s central planners can manage it so it’s not too painful. But we wouldn’t bet on it.
Lastly, the world’s other major powers are making increasingly dumb moves over Ukraine. Russian military forces are building on Ukraine’s eastern borders and the US, still trying to project some kind of authority and force, have promised retaliation if anything happens.
Lunatics, all of them…
for The Daily Reckoning Australia