Markets calmed a little overnight. The instigator of much of the day-to-day trouble, oil, took a day off, falling ‘only’ 1%. That’s a reasonably subdued move for oil these days.
Gold was the big mover. It jumped nearly US$30 an ounce or just over 2.3%. The release of the Fed’s minutes (from its last interest rate meeting) was behind the surge. Here’s the quote the market focused on:
‘Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and that waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent,’
In other words, The Fed is concerned about the recent market turmoil and doesn’t want to raise interest rates anytime soon.
Who could’ve known?
I say that in jest. But there were plenty of professional ‘commentators’ saying not too long ago that the US economy was strong and a rising interest rate cycle was upon us. It turns out we got one rate rise before everything turned to…dirt.
One man who saw this coming a while ago was my mate and The Daily Reckoning co-editor Vern Gowdie. Vern’s been banging on about the deflationary forces impacting Australia and the global economy for ages.
Last year, he published a book about it. He called it, The End of Australia: The Real Story Behind Australia’s Coming Economic Collapse and how to Survive It.
15,000 Australians read that book. It really hit a chord. We sold out of our physical stock quickly. If you missed out, you can still download an electronic version here, free of charge.
Since publishing the book in mid-2015, many of Vern’s predictions have played out. The global economy is doing just what Vern said it would.
So what happens next, according to Vern? Well, he’s just updated his thoughts on the Aussie economy. Click here to see Vern’s new presentation.
When it comes to the Aussie economy, you have to have a big picture perspective to see what’s going on. If you don’t, you simply won’t understand things.
For example, there is a strongly held view that the Aussie economy is in good shape. That it’s successfully transitioning away from the downturn in mining investment to more ‘balanced’ growth.
The RBA is the biggest proponent of this view. Clearly, Australia’s central bank has decided that confidence management is more important than objective economic analysis.
The thing is, on the surface the Aussie economy is doing OK. But it would be wrong to think that it’s all good from here.
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The reason behind the economic improvement relates to the housing boom and the big increase in household debt that produced the boom.
An increase in debt reflects an increase of money flowing around the economy. As this money changes hands in exchange for various goods and services, it produces an increase in jobs (in the sectors involved) and an increase in economic growth.
But if this economic activity stems from an interest rate cutting cycle, which produces a major increase in asset prices, is it not a little complacent to believe that the benefits will be lasting?
I think it is. But complacency has been an Aussie trademark for years. We’ve mistaken luck for good management. We want to acknowledge the prosperity but not the debt behind it.
As Vern points out in his book, this is not an attitude that will serve us well in the future.
Politicians, for all their ignorance, know this. That’s why the battle for reform is underway. Labor kicked things off in earnest by announcing reforms to negative gearing this week.
The Libs have responded with…not much at all actually. They’ve put GST reform in the too hard basket and they’re too scared to go to the election with negative gearing reform.
The whole debate about negative gearing is hilarious. Instead of a serious discussion about the pros and cons, all you’re seeing is desperate attempts by special interest groups to maintain the perk.
The fact that the Libs defend negative gearing because it will impact ‘ordinary Australian’s like nurses and teachers is laughable. When have the Libs ever cared about them!
Saul Eslake debunks this myth in today’s Financial Review:
‘Proponents of negative gearing routinely assert that it is primarily used by taxpayers of ‘comparatively modest’ means to ‘get ahead’, that it makes a ‘vital contribution’ to ensuring an adequate supply of rental housing, and that without it rents would ‘go through the roof’, as they allegedly did between 1985 and 1987 when the Hawke Government temporarily abolished it.
‘None of these assertions withstands a moment’s confrontation with the facts.
‘The latest available ABS data, which are for 2013-14, show that 72 per cent of the total value of investment properties is owned by, and 50.7 per cent of the total value is owed by, the richest 20 per cent of households – many of whom use negative gearing, and other strategies, to reduce their taxable incomes.
‘That’s one reason why the assertion that nearly 80 per cent of taxpayers who use negative gearing have taxable incomes of less than $80,000 is misleading.’
The Libs favour the wealthy. They want to protect negative gearing because it bestows the rents that come from land value on the relatively wealthy few. It has nothing to do with fairness and everything to do with maintaining a system that enriches the landowner at the expense of the indebted and the landless.
For that reason, I doubt the policy will change. There are just too many vested interests involved and they will lie, scratch and kick to make sure nothing changes.
If you want to find out more about how the issue of land rents work, and how it affects you, Cycles Trends and Forecasts editor Phil Anderson knows more about it than anyone else in Australia. You can click here to find out more.
For The Daily Reckoning