Crazy? What Did You Expect?

boss screaming at small businessman

If you want an antidote to all the gibberish, charlatans, fraudsters, politicians, central bank double-speakers and whatever else winds you up about modern day markets and investing, let me introduce you to my old mate Jim Rickards.

Well, old mate might be a little presumptuous. Jim’s more of a professional acquaintance. But that just sounds so stuffy…

Anyway, I first met Jim in 2012 as I recall. He was in Sydney at thecone time and offered to give a presentation to Daily Reckoning readers. We hastily arranged a venue (the Museum of Sydney) and it sold out immediately.

I nervously gave the introduction speech and then Jim proceeded to wow the audience.

Two years later Jim attended our World War D conference in Melbourne. I asked if we could do an interview on camera. Ever the gentleman, Jim agreed.

We chatted for about 45 minutes about currency wars, gold, China and Australia’s place in the world. There are no pithy sound-bites with Jim. Just intelligent analysis that you won’t hear anywhere else.

You see, Jim has a unique background. He’s a Wall Street veteran but also has ties and access to the CIA and government, among others. He knows how Wall Street really works. And it’s not the sanitised version you see in the mainstream press.

It’s a dirty game. Where governments fight economic war under the cloak of diplomacy and mutual cooperation. It’s a war Jim is acutely aware of.

The good news is we’ve arranged to publish Jim’s intelligence, designed specifically for Aussie investors. My actual mate, Tim Dohrmann (former editor of Money Morning and Australian Small Cap Investigator) is in on the project.

If you’re interested in Jim’s work, we’re offering his new book The Big Drop for the cost of postage to get you started. Click here for details.

Jim’s also pretty adept at interpreting central banker speak. Given that, I would be very interested to know what he made of RBA boss Glenn Stevens’ speech yesterday.

In the absence of Jim, you’re stuck with me today, so allow me to have a crack.

As you know, I’ve been critical of the Aussie economy’s direction for some time now: over-reliance on interest rates for stimulus, complete lack of a reform agenda, political incompetence and ignorance of our looming economic problems. Oh, and complete reliance on a housing bubble to sustain economic growth.

Pure idiocy.

Now, one of the chief architects is getting worried.

Yesterday, Glenn Stevens called parts of the Sydney property market ‘crazy’. He is also deeply worried about where economic growth will come from in the years ahead.

On the issue of property prices, what did he expect would happen at historically low interest rates? Interest rates are a blunt policy tool. They affect different areas and industries to varying degrees.

When Steven’s went on a massive rate cutting cycle from 2011 to 2013, and then followed it up with a few more cuts this year, surely he knew it would lead to economic distortions, like property bubbles?

In that case, why wasn’t their greater coordination with the banking regulator, APRA, to ensure investor lending wouldn’t get out of hand. Why didn’t the government act to negate some of the distortions fuelled by the low rates?

The performance of Australia’s ruling class over the past few years is akin to an unwieldy and ineffective corporation operating with a ‘silo’ mentality. That is, each department goes about its business without consideration for any other part of the business.

Generally, when that happens, the business goes down hill. Shareholders get restless and call for change. Senior management get the axe and the company goes through some tough times before recovering.

Unfortunately, things are not so easy when it comes to national economic management. Australia’s politicians and policymakers have absolutely failed in their task. However they, along with a compliant media, control the narrative. There is always something else to blame. The buck never stops here.

After enjoying one of the largest booms in our history, Australia now faces a grim economic future. It is one we are not prepared for as a society or equipped to deal with through the calibre of our ruling class.

Tony Abbott and Joe Hockey have proved themselves totally incompetent in understanding our economic challenges. So the chances of them coming up with a narrative to help us through these challenges is zero.

Last week, Hockey referred to those warning of tough economic times as ‘clowns’. Now Glenn Stevens is in this category. Welcome aboard Glenn!

Glenn is worried because he knows lower interest rates are not working to stimulate the economy.

He’s right. Official rates are at 2%. But yesterday’s consumer confidence data showed a slump back to pre-budget levels. Importantly, perceptions of ‘economic conditions over the next five years tanked 17%. The consumer isn’t happy.

You’re looking at business investment falling sharply next year too. The hoped-for pick up in dwelling investment is nowhere near big enough to offset the fall in mining and manufacturing investment.

That’s because most of the speculative capital (and foreign money) flowing into the real estate market goes into established housing. That’s another regulatory failure.

In fact, it’s against the law for foreigners to buy existing housing stock but our regulators are so passive and compromised the law is completely ignored.

I spent some time this week going through the national accounts in detail. The household sector is pretty much the sole support for the economy right now. I wrote about this in the just published June issue of Sound Money. Sound Investments. In brief, household income growth and final demand is approaching levels last seen during the GFC.

But back then the government’s budget position was in much better shape. Rudd was able to generate quick cash handouts. There was plenty of interest rate ammunition and China was about to unleash it’s housing boom.

We have none of those things now.

Another interest rate cut is coming. That’s all we’ve got. It might buy us another few months of reprieve but that’s about all. Then we’ll be back to square one.

To add to the confusion, now Stevens is visibly worried about the monster he created…the Sydney housing market. Why he doesn’t just say, ‘APRA needs to tighten lending standards fast or we can’t cut interest rates’, and say it publicly, I don’t know. Honesty and transparency aren’t the hallmarks of regulators and politicians.

One thing Stevens did say caught my attention though. He’s trying to tell a dopey government to get moving on a coordinated infrastructure plan:

…it would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects, surrounded by appropriate governance on project selection, risk-sharing between public and private sectors at varying stages of production and ownership, and appropriate pricing for use of the finished product.

The suppliers would feel it was worth their while to improve their offering if projects were not just one-offs. The financial sector would be attracted to the opportunities for financing and asset ownership. The real economy would benefit from the steady pipeline of construction work – as opposed to a boom and bust. It would also benefit from confidence about improved efficiency of logistics over time resulting from the better infrastructure. Amenity would be improved for millions of ordinary citizens in their daily lives.

We could unleash large potential benefits that at present are not available because of congestion in our transportation networks.

I’ve been on about this for a few months now. And the stocks I tipped to take advantage of this coming growth are doing well. They’ve been immune from the recent sell-off. To find out more about one of the few genuine growth areas for stocks, click here


Greg Canavan+,
For The Daily Reckoning, Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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2 Comments on "Crazy? What Did You Expect?"

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David Bruce
David Bruce
1 year 4 months ago

Great, thought provoking article! When you realise who is blackmailing and writing the scripts for our political masters, it doesn’t matter who we elect. The 5 eyes + 1 are all singing from the same hymn book, and it is obvious our planet is complaining. My worry is, the blackmailers are prepared to use the Samson option, to get their way…

1 year 4 months ago
How about making the market based on the exchange between credit and debt a free market – float interest rates and you no longer need a central bank. Stevens should have the guts to own the damage his regime of artificially low interest rates have done. Stevens should have anticipated the danger of an interest-rate-fuelled property speculation bubble in Australia given the other settings: (1) negative gearing, (2) SMSFs allowed to speculate in real estate, (3) the 50% discount on capital gain for real estate speculators, (4) the exemption of the owner-occupied home from the age pension assets test, (5)… Read more »
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