Proof the ‘experts’ don’t get it

Proof the ‘experts’ don’t get it

Two months ago, we got our first rate cut in almost three years.

It was quickly followed by another one a month later.

That same month, Prime Minister Scott Morrison managed to pass through a bunch of questionable tax cuts.

The majority of Aussies were going to score an extra 1,000 bucks come tax time.

Have they worked?

Did these measures stimulate the economy the way our leaders hoped?

Time to check the pulse of the Aussie economy, using my favourite metric…

When the experts get it wrong

The experts are baffled.

Somehow, electronics retailer JB Hi-Fi continues to defy market conditions.

This week, the company announced its revenue for the 2019 financial year was up 3.5% to $7.1 billion. To boot, it banked a $249.8 million net profit after tax — up 7.1% from the year before.

Investors clearly saw the writing on the wall, as JB Hi-Fi’s share price is up 26% for the year to date.

Yet, JB Hi-Fi is the seventh most shorted stock on the ASX.

What’s unusual about this is that this highly profitable retailer is the only retail stock currently being short sold by institutional investors.

Because out of all the stocks to short sell on the ASX, there’s a heck of a lot worse.

I mean, hardly any of Australia’s department stores are in good health.

Take South African-owned David Jones, for example. Now under Woolworths Holdings Limited [JSE:WHL], DJs recently had $437 million wiped from its value. The company is now worth less than half of what Woolworths paid for it.

Locally owned discount retailers aren’t doing much better.

Back in June, both Target and Kmart had their earnings for this year downgraded.

Parent company Wesfarmers Limited [ASX:WES] announced that full year earnings for the two chains were likely to drop as much as $103 million. If that does play out, that could be a 17% drop from last year.

And Myer? Ugh, the less said about that basket case the better.

But surely the recent government tax cuts are going to turn this around, right?

The anticipation effect

What happens to an economy when it gets a sudden, unexpected windfall?

In our case, that’s the $1,000 one-off handout from the government.

The newspapers — and even governments — assumed this cash would automatically go to retailers. The reality is very different.

And luckily for us, we have hard data to show us exactly how this windfall will play out.

Remember when former prime minister Kevin Rudd gave every Australian $900 in the hope that they would spend it?

Well, it turns out a couple of super-smart people got together and looked at how this money actually filtered through the economy.

They wrote a paper called ‘Fiscal Stimulus and Households’ Non-Durable Consumption Expenditures: Evidence from the 2009 Australian Nation Building and Jobs Plan’. It was written in 2012, three years after Rudd put some coin in our pockets.

And this paper overwhelmingly proved that Rudd’s handout had very little effect on the Australian economy.

In fact, the paper called it ‘statistically insignificant’, writing:

The paper’s main finding is that household consumption expenditures on non-durables did not react significantly during or after the one-time, pre-announced transfer. The estimated effects are also quantitatively small.

They imply that upon receipt of the transfer, the average household spent less than 0.2 percent of the income windfall.

Did you see that?

The total increase in consumer spending jumped by only 0.2%.

That’s it.

Oh, but the paper gets better.

Of the few people who did spend the money, they pretty much spent dollar for dollar.

In other words, people only spent the money they received, rather than spending more.

And here’s the kicker.

They mostly bought ‘non-durables’, which are short-life items like food.

Yep, that’s right. It wasn’t a boon for retailers. We filled our fridges and had friends around for backyard barbecues.

To top all of this off, the majority of single-person households saved their money. It was pretty much just families that spent money on the basics.

However, there is something that’s worth noting.

And that is the anticipation effect.

As the paper explains, the ‘fiscal policy literature on anticipation’ means we actually increased our spending before we even received the money:

When fiscal policy is pre-announced (i.e. there is a time-gap between the actual fiscal stimulus and the period in which the news of fiscal stimulus is made available to the public) the response of economic variables to the actual fiscal stimulus may not be the same as the response to the fiscal stimulus announcement.

In particular, the response of economic variables to the actual fiscal stimulus may be insignificant and the reason for this is that, with fiscal anticipation, economic variables already respond at the time of the announcement.

Once we knew we were getting money from the government, this boosted spending by 1%.

Already spent

The whole research paper explains that people are more likely to spend money when they think there’s money coming.

But once they actually receive the money, they hold on to it. 

Why bring this up today?

Well, towards the end of this month, the majority of ASX-listed companies will begin reporting their full year earnings.

That means we’ll get to see just how bad Aussie retailers are doing.

Some may argue that the rate cuts and tax cuts are yet to filter through the economy. If you see those sorts of lines trotted out, ignore them.

The Aussie retail sector is losing money. A rate cut or a government handout isn’t about to turn things around.

The recession for individuals is underway

And it won’t be long before it shows up everywhere else.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia