The Message About The Economy That No One Wants to Hear


US markets didn’t do much in Friday’s trading session. Weakness in US retail sales gave the Fed another excuse to keep rates on hold, so markets were happy enough with that and held near all-time highs.

From an economic perspective, though, the retail sales data wasn’t too healthy. Sales for the month of July were flat, against expectations of a 0.4% gain. Excluding car sales, retail spending dropped 0.3%.

But it’s only one month’s data…one piece in a grotesque and ever-expanding jigsaw puzzle that the Fed is trying to complete. The market seems to be betting that it will never get to the end of it. There will always be a reason for the ‘data-dependent’ Fed to hold off.

This is why stocks are trading at all-time highs, even while the economy limps along like a lame dog.

If you want to know where this will end up, look no further than Japan. As Bloomberg reports:

The Bank of Japan’s controversial march to the top of shareholder rankings in the world’s third-largest equity market is picking up pace.

Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy.

At this point, I’m genuinely wondering how many unprecedented campaigns Japan has to embark upon before someone, somewhere realises this is all a big joke, and that direct intervention in the markets and the economy will NEVER work?

Sadly, I’d say they have quite a few such campaigns up their sleeves just yet. Which means Europe, the US and Australia have plenty of monetary insanity left in the barrel.

Although in Australia’s case especially, it’s going to be a delicate balance. When the RBA cut interest rates by 0.25% a few weeks ago, it apparently meant the end of the property boom. From the Financial Review on 2 August:

The Reserve Bank of Australia has declared the threat of a property bubble is over after cutting the official cash rate to an unprecedented low to shield the dollar against a wave of global monetary policy stimulus and money printing.

Reserve Bank governor Glenn Stevens said in a statement after his penultimate board meeting that “the likelihood of lower interest rates exacerbating risks in the housing market has diminished.”

Where Glenn Stevens got that idea from is anyone’s guess. Low interest rates pushing asset prices up? What nonsense!

But two weeks after the cut, in this morning’s Financial Review, there’s this headline:

‘Home prices soar as buyers target slim pickings’

…followed by:

A Sydney house bought for $3.85 million two years ago sold for $5.15 million on Saturday as strong demand again outstripped measly supply in weekend auctions.

No bubble here, though, according to the RBA…

Given that Australia is experiencing the slowest wages growth in its history, you can only assume that the ongoing strength in house prices relates to an ever larger borrowing capacity.

If there has been a clampdown on lending recently, it’s hardly been broad based. Talking to a mortgage broker friend a few weeks ago, it appears the ‘crackdown’ related to gaining more certainty around foreign-earned income.

In his view, this was a way to restrict the flows of money (of dubious origin) coming in from China and Asia. As such, the crackdown would mainly impact the inner city apartment market, rather than the broader housing market.

I can tell you from anecdotal experience that banks have been increasing the amounts they will loan to residents in recent months.

That’s why house prices continue to set records, despite what the RBA thinks is going on.

Look, we like to put the boot into the RBA a lot. Quite frankly, they deserve more scrutiny and criticism than they receive from the mainstream media.

But readers often say that we’re merely complaining. We offer no solutions to the world’s problems.

That’s true. But that’s because the time for solutions was years ago. We’re too far down the rabbit hole to be talking solutions. There’s only bad, and less bad. Bad is to keep on doing what we’ve been doing for years…more stimulus, lower rates, more stimulus, lower rates…

If we keep going down this path, things will get very bad indeed. Or we could just stop pretending now; instead, we could try and work our way out of the problems associated with excessive debt using structural economic reform and hard work. That’s the less bad option.

Debt is just future consumption brought forward. By encouraging debt, we are encouraging society to immediately satisfy its wants…without having to work hard and make sacrifices for it in the first place.

In fact, we are rewarding that part of society that accumulates debt, while punishing those that save and defer their wants. How do you create genuine wealth with such counter-intuitive price signals?

The modern economic system has upended centuries of accumulated wisdom about how risk and reward works…about the relationship between creditors and debtors.

The modern economic system is broken. There are no painless fixes to a broken system. But no one wants to hear this message.


Greg Canavan,
For The Daily Reckoning

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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