Comments
Transcript
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RENow would be a good time to revisit this idea
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NNI've lived in Australia for 6 years. To my simplistic mind, Australia's real growth happened because of 3M's - Mining, Milk and Mortgages. The dairy industry has collapsed and is in the capitulation stage, Mortgage flipping isn't creating price increases and Mining is something that could create value in the junior mining space where precious metals have looked up. Australia's visa system attracts the worst from developing countries especially India, compared to the US which attracts the best PhD brains who create entire new industries in Silicon Valley. Australia attracts taxi drivers who come over on a student visa and convert the visa into a permanent residency. Australia's collapse could be blamed on socialism which has fostered an entire generation of bottom feeders who only wish for bread and circuses from the political leadership and are very assertive voters. This is the very world view that has brought many third world countries into dysfunctional, capital deficit societies. The conservative bench is controlling Australian politics who are basically nut cases. Subjecting ex-PM Malcolm Turnbull through the leadership spill and ousting him was the last straw which broke the camel's back in recent politics. The Australia of the future will consist of large numbers of international students, unemployment, poorly made construction which will render Melbourne and Sydney into a Brazilian favela. The Government will respond with more policy intervention, more spending, more tax terrorism, more regulation and the RBA will respond with more cash rate cuts.
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RSYet to watch, but interested to see what the perma-bear says. He’ll be right with timing sooner or later surely? It is great to see Aussie financial talent being so positively received on Real Vision. #LittleAussieBattler
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TMI think this is the first time I have every heard Gerard mention G-O-L-D on Realvision, albeit briefly. Personally, I'll leave this interview with the takeaway that this is significant W.R.T MMT.
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ABAnother old guy preaching we "need" inflation to keep his assets prices up when the under 40 year olds want deflation (they just don't know it yet). Other than this bunk perspective I agree with his outlooks.
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DSOne of the best period. DLS
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JSexcellent wide ranging interview
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BHGreat stuff from the Permabear but timing certainly seems right now. I can only assume they caught him out filming from the side they did since it exposed to 2in wide hole in his sock that otherwise would have been on the inside??
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PUThe crazy socks are back!
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TDFinally heard a reasonable defense of MMT, and from someone who doesn’t even support it. I’ll continue to point to Venezuela anyway, but I very much appreciated this interview.
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SvAll nations will use all tools available to meet their national goals of security and prosperity. That includes "weaponizing" the currency if that will improve the security of the nation.
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JAWhat does he mean by "...then the reason you tax is to prevent the private sector from competing for the resourced you're after"? at "21min45sec left". I have always thought the idea of abolishing all taxes and just having the government spend money into existence was an interesting one.
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KRI've seen Gerard speak live before and love his work. He's definitely been more right than wrong on Australia. I would agree that the probabilities of an Aussie recession are higher than they have been for a long time. However, with the following caveats. Gross household debt to disposable income is indeed at record levels. But when talking about Japanese debt Gerard cited net debt and made that distinction. If you apply the same lens to Australian households, in Australia 'offset accounts' are popular and half of all borrowers use them. Offset accounts are just cash deposits that effectively offset your mortgage. If I have a $200k mortgage and $100k in offset I only pay interest on $100k. Once cash deposits are taken into account net debt to disposable income is around 120% rather than the close to 200% gross figure that is often cited. Households also have strong asset positions through our compulsory superannuation system and the portion of loans in negative equity with price declines to date is still very low. Looking at Aussie RMBS since June last year there have been 153 ratings upgrades and only 6 downgrades primarily due to prepayments that de-risk the RMBS. According to CBA data 80% of borrowers are ahead on repayments with an average of 32 repayments worth of buffer. Needless to say sentiment in Australian housing has gone to shit. Sales have gone down the toilet, stock is not moving and as Gerard mentioned, building approvals are drying up that will lead to a collapse in construction activity. I think betting against credit risks though is a harder trade and I would not short the banks for some of the reasons Gerard mentioned. Also Gerard mentioned that the Perth property market has been in decline for a few years now due to mining slowdown. That is true but we haven't seen a US style subprime meltdown there (of course there have been some defaults and there are developers going bankrupt over there now but not absolute blood on the streets). Currently 12% of Perth borrowers are in negative equity. But instead of mass defaults what's happened is people have just held on not wanting to realise losses. This has meant housing activity has collapsed. Less housing stock traded in Perth last year than in the last 1991 recession yet you have double the housing stock you did back then. Due to tougher bankruptcy laws here people just don't leave the keys in the letter box if they are underwater. I'm not saying mass defaults and credit risks boiling over is impossible, I just think betting on declining housing activity is a higher probability trade than betting on the credit risks. I think retailers geared to housing activity are a better bet such as Harvey Norman, Nick Scali, Duluxgroup and JB HiFi. Bluescope Steel is completely geared towards housing construction due to their Colourbond product, which generates the vast portion of their EBITDA. I used to work in their economics department and I can tell you they watch housing construction like a hawk as they know that's where most of their earnings come from. Homebuilders and property groups like Abacus, Stockland and Lend lease will also cop it in a slowdown. Infrastructure investment is really ramping up over here and there are green shoots in the mining sector Gerard mentioned. Unclear how this offsets resi property slowdown. Australia does have much better fiscal positions than other developed markets so there is more firepower on the fiscal front and the RBA has not expanded their balance sheet like other foreign central banks. So there is some firepower there if we slip into recession - not saying it's going to be pretty though. If there is global recession and China falls off a cliff (I profess to have no idea what goes on in China) I think it could get very ugly for Aus and in that scenario you would want to be long ACGB's (although they have rallied a lot this year) and short AUD. Currency still has a long way to fall in my view if Aussie conditions deteriorate IMO
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DKProbably my favorite interview so far.
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DMBrilliant interview Gerard! Appreciate your insights in particular regarding MMT and China. Cheers
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DCGreat interview - hope the next interview with Gerard will be soon - RV viewers need to hear from him more than every 3 years. Also very impressed by the interviewer - succinct, unobtrusive and good value add. I do recommend this piece on MMT by Gerard https://blog.evergreengavekal.com/mmt-can-kill-secular-stagnation/
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RMBloody brilliant
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KDExceptional analysis on the current state of the Australian economy. Look forward to having him back on the show when the situation progresses!
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TRI finally got my answer to what's wrong with a debt jubilee. It's because if printing money is acceptable then why do you need to tax? If there is no fiscal responsibility and we deem it acceptable to simply print what we need - no need to tax - The implications of that on markets, currency, etc, is mind boggling to me. Can't even being to get my head around that. Great interview!
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CDInteresting. However he gets the construction industry absolutely wrong. I have commented many times on this before because I work in it and I know what is happening. The last couple of years were a massive boom of high rise residential construction and housing. This is over agreed! However why is none talking about the biggest ever boom in commercial construction that ever happened in Australia??? There are tons of hospitals, casinos, shopping malls etc being built in the new residential areas that were a result of the previous booms. There is a big consolidation in the industry and the companies that successfully changed profile from residential to commercial are sucking up the workforce. This is vastly overlooked! One more point is that even though current savings rate is negative, net household assets are almost highest in the world. Even with further asset price declines it will still stay relatively high. Furthermore there is steady wage growth. All this said a recession would be great to buy cheap assets.
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CHGreat, insightful interview, thanks. Anecdotally, there is already a recession in Australia. We just haven't yet gathered the data to measure it statistically. In six months, we will know that entered a recession three months ago. The only open question is how bad things are going to get. Interesting comments about MMT funding fiscal policy, in tension with monetary policy controlling inflation, and controlled currency debasement supporting export growth. The problem is that history shows fiscal spending is very easy to expand and politically extremely difficult to contract. In Australia specifically, fiscal expansion has proven impossible to contract over the past ten years, even when a government wanted to do so. So in Australia MMT would in practice mean an ever-growing public sector, ever-expanding money supply, ever-increasing interest rates and ever-more expensive imports for an economy that has been hungry for foreign capital ever since Europeans settled there. There is a good chance that MMT would be attempted in a financial crisis, especially if Shorten comes into government, but it would be a hiding to nowhere.
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TKFascinating macro views. Class act.
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REExcellent interview! Truly covered all important points one could in that amount of time.
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JSGreat interview!
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JMTop Notch. Please bring him on again
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MCExcellent interview over a wide range of topics. Interesting perspective on Australia facing a recession on its own and what that might mean for stock prices.
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PCAny possibility to get someone talk about Canada here?
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BYnever expect we'll have uber bear from the down under! enjoyed this show
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SSWow! Spectacular insights. Great communicator. Gerard has such a broad global view, and excellent insights into Australia. It’s hard to get opinions on Australia that aren’t extreme and lacking nuance. Fantastic stuff.
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JLVery, very good interview. What we must understand is and the point clearly made is that not only is Australia got household debt at astonishing high levels to income but the savings rate which is quoted at 2% is misleading! Not only is this figure weak, it’s wrong AND in negative when as Gerard points out you pull out the employer provided 9.5% compulsory saving. High personal debt, negative personal savings. Equity mate, can only get you so far!
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RBActually one of the best economic interviews/presentations I have seen Real Vision or anywhere else.
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IAGreat interview, fantastic guest. Wide ranging conversation with many interesting insights. More please!
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DSGreat interview on so many hot topics. I will need to watch a couple more times just to understand some of the main points. On first viewing, the rabbit hole of a free lunch just gets deeper and deeper. We have gone from deficit spending when the economy is in trouble and paying it back when the economy is better to deficit spending when the economy is in full employment just so we do not have to tax to pay it back. All the QE did not help the real economy because the excess money is not employed in profitable projects. Japan has used any QE and or early MMT to build infrastructure everywhere. Per Mr. Koo, this has kept the Japanese GDP from falling off the cliff. Hard assets like land, commodities and gold look like the main hedge. I would like to see Mr. Koo return and discuss his opinions on MMT. Will it also raise stock prices like QE? For me this is scary stuff. DLS
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WYThanks for the interview. Am from Australia, been having similar views lately as well, good to hear it being agreed with. On the other hand, it’s quite worrying, most people here seems totally unaware of the economic situation.
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MJGreat interview. Gerard offers great insights. Thanks
GERARD MINACK: Now, I'm not making a recession my investment base case yet, but if we were to get another two or three months of data like the sort we've had over last two or three months, then I think investors should make recession their investment base case in Australia. What deck of the Titanic are you on? If the ship hits the iceberg, let's not fuss about it. They're all going down.
MATT MILSOM: All right, Gerard, welcome back to Real Vision.
GERARD MINACK: Thank you.
MATT MILSOM: Great to have you.
GERARD MINACK: Thanks for having me.
MATT MILSOM: Should we kick off with an update on Oz?
GERARD MINACK: Sure. it's getting interesting.
MATT MILSOM: It is.
GERARD MINACK: I mean, the bears have known the outline of the bear case for some time, which is quite simply the world's most expensive housing stock-- I guess outside some small city-states-- a hugely indebted consumer that has no saving, and a reserve bank that's got very little room to respond if anything goes wrong. Now as they outlined, there have been some positives that have kept us away from the precipice for some time. And what I've focus on over the last four or five years is, first and foremost, population growth-- just keeps the wheels turning over. It means that it's not clear we have a huge excess supply in housing.
I'll give you one stat-- the rental vacancy rate is below average and falling. It's generating demand for infrastructure, and here we are in Sydney and all the roads are being dug up as part of the spending that it's doing. So, that's an offset. Another important offset is the mining Capex boom. And it did boom, then bust-- but the bust has almost run its course. So, mining Capex as a share of GDP went to 9% at its peak. It's now back at a little below 3%, so it subtracted 6% from GDP over the last four or five years. But that's probably now the floor for it.
There's a few other positives you can throw into the mix, such as we continue to debauch our tertiary sector-- that means more foreign students. And, statistically, by saying a lot of LNG will add to GDP growth-- although it's fairly calorie-like growth, it's not going to add much to anything. So, what we've been going through for the last, I guess, 18 months is the housing market starting to soften with the consequences that growth is starting to weaken. But we've been kept afloat by these positives.
What's happened over the last quarter or two is we're seeing signs that the downdraft in housing, borrowing, and wealth effects are starting to build steam, and that's making it increasingly likely there'll be a recession. Now, I'm not making recession my investment base case yet, but if we were to get another two or three months of data like the sort we've had over the last two or three months, then I think investors should make recession their investment base case in Australia. And if we were to see a recession, trust me, it would be world's best practice.
This would be disaster, given how indebted we are, how expensive your asset prices are, and the inability of policymakers to respond. That's if we get a recession. So, what's the odds? Well, I mean, the things to watch-- supply of finance to housing. I mean, when you have house prices as high as they are in Australia, the demand for housing is just a function of the supply credit.
House prices themselves, building approvals, now despite the population growth, the fall in approvals over the last four months has been large enough to suggest that residential construction will probably subtract about a percent from GDP over the next 12 months. But then the big one-- but this is also the big unknown-- is the wealth effect. So, it's quite clear that because house prices have been on this rampant bull market for some time, Australians have been willing to reduce their saving.
According to the Bureau of stats, we're now saving about two percentage points of our disposable income. But it's worth recalling that on the income side, the statistician includes the compulsory pension contributions that employers make. Now, once you take that into account and, sort of in a sense pull them out of the numbers, the saving rate's effectively negative. If you're saying, well, how much do you save out of what you actually trouser every week, I'm actually overspending.
So, if the wealth effect is strong enough-- in other words, if people adjust upwards their saving rate fast enough as house prices fall-- then we're toast. In particular, if we follow the pattern that we saw of economies that experienced material house price bubbles then busts in the GFC, what they saw on average was around about a 2 and 1/2 percentage point increase in household saving year two and three after the house price peak. Interestingly, the saving rate continued to fall for about a year after the house prices peaked in the GFC, much as the saving rate continued to fall in Australia last year, even though house prices were falling.
If we see that 2 and 1/2 percentage point adjustment, that, by definition, means spending has to grow lower than income. The trouble is in Australia at the moment, real aggregate disposable income growth is roughly zero. So, if you're going to increase your saving with no income growth, you've got to cut your spending. So, that is the recession scenario. And, interestingly, if you're looking for early hints that it's starting to unfold-- if you look at spending at the state level-- and I like to look at spending per person, so that I don't get confused by some of the interstate migration numbers-- spending over the course of last year in Western Australia-- capital city is Perth-- fell.
Now, what's interesting about that is house prices in Western Australia-- both in Perth and the regions-- have been falling for two or three years. In other words, if anybody in Australia is at the stage where household saving rates start to drift up, it's the West Australians. Now, this is circumstantial evidence. I have to use that, because the statistician doesn't publish the state-level saving rate data, so I can't just reference that.
But it's interesting that it's clear that consumers are weaker in Western Australia on a per capita basis than anywhere else. And they are further into this house price decline than anywhere else. And if the rest of the country follows that pattern, things will get worse in the second half of the year. And, as I said, investors need to make recession their investment base case.
MATT MILSOM: Do you think the Royal Commission let the banks off?
GERARD MINACK: I don't think the Royal Commission did, but I suspect the politicians have. I mean, speaking from the man on the street, which is staggering to find out just how big a gap it is between punishments when you rob a bank versus when the bank robs you. I tell you what-- if I was ripping hundreds of millions of bucks off people, I wouldn't be getting a rap across the knuckles-- and please don't do that again from the regulator.
So, even if we don't crack down hard on the banks for what they have done, surely they're aware now that every politician would love to hang one of them high in a tree for something they do going forward. And you would think that that's one reason we've seen this credit contraction. But, guess what? They're actually starting to check things. And one of the other surprises from the Royal Commission was that, yes, we do have a lot of liar loans in Australia. But, unlike in America where the lying was done by the borrowers, here, more often than not, it was done by the lenders.
MATT MILSOM: Or intermediaries.
GERARD MINACK: Or intermediaries-- their agents, that's right. So, that's part of the reason we've got this decline in credit provision, which is feeding directly through into weaker house prices.
MATT MILSOM: Seemed to be happening before the Royal Commission, though.
GERARD MINACK: It's done. I think that's because if you look at the detailed numbers, the initial decline in credit approvals was for investors. And, initially, that was a desire of the reserve bank, and APRA in particular, to slow the lending for investment properties. And they did actually put a cap on it. Now, that started to come into impact two and a half, three years ago. The new news just over the last six months has been the rolling over in lending for owner-occupiers. So, this is upgraders, and that's where the Royal Commission fingerprints are all over that.
The uncertainty is this-- is that recent decline, which started September-- we only have dire up until January-- is that a permanent tightening of credit standards, and will we continue to see credit aggregates continue to slow? Or, is it simply they put in place new processes that are extending the loan approval system, and what we're simply observing at the moment is an air pocket? But, once people get through this more extended process, the flow will resume at a more normal rate in a couple of months.
MATT MILSOM: For a soft landing.
GERARD MINACK: That's your soft landing scenario. That's where your credit approvals start to inflect, move a little higher in the next couple of months. If-- there's going to be a few, ifs, in this-- but if after that, you then get people going, house prices are 10%, 15% lower now than they were their peak. So, I'm now willing to borrow again and put a floor under it. This is against a backdrop of a still decent unemployment rate-- i.e. low.
That's your soft landing scenario. That's where we start to see the nosedive in house prices inflect. We then get a sense that house prices peak to trough nationally will not be falling 20%. They'll be falling, perhaps, at 15%. But, once you get that sense of a soft landing with a few other goodies from the government, we have a slowdown. I mean, we don't know how to support a slowdown here, but we don't get a tipping over the edge to job losses. Once you get job losses, that's the dynamite stick into the pond. There's going to be a few things float up.
And it's worth recalling in Australia that what we are now seeing with house prices declining is the first decline in nationwide house prices not associated with either RBA rate increases or a rise in unemployment. Now, if we were to get either of those things--
MATT MILSOM: We won't be getting RBA rate increases, that's for sure.
GERARD MINACK: You start the rinse and repeat cycle all over again. You get a second leg down in house prices. My view is without any rise in unemployment, we're probably talking about a 15% to 20% peak to trough decline in capital city house prices.
MATT MILSOM: Which is the average in previous downturns, right? Ish.
GERARD MINACK: It's at the high end. It's at the high end. But, I mean, it's not unprecedented. It's at the high end. If we were to get job losses--
MATT MILSOM: Which is green shooting at the moment. The rate of change is not particularly--
GERARD MINACK: In employment?
MATT MILSOM: Yeah.
GERARD MINACK: No, it's OK, but I can point you to a couple of things. Some of the leading indicators are starting to weaken. If you look at hiring intentions in corporate surveys, if you look at job advertisements-- say, the ANZ or the government's just cancelled the number of vacancies-- are clearly turning over. They're not yet at the stage of signaling outright job declines.
We can see evidence that we like to see at outright job declines is actually now in the construction sector. Guess what? Building approvals gives a pretty good lead on how many traders are going to be in employment about nine to 12 months ahead of time. And where we are now, it looks like you will see construction sector employment decline later this year. Now, they punch above their weight, because these are better paid jobs. So, there probably will be some weakness.
But I do agree with you-- I'm not yet at the stage of being a point to leading indicators that tell you you will see aggregate economy wide job losses. They're not there yet. And that's why the intermediate stage you need to go through is the wealth effect to weaken the consumer, then you are likely to see those leading indicators roll over. And that's why recession starts to become the base case. We're not there yet.
MATT MILSOM: When we are there, your favorite short will be the currency or the banks? Or banks before a dividend cut?
GERARD MINACK: If I got the option of all the above-- look, I mean, I think if we had a recession, the cash rate to zero, 10-year treasury below 1%, Aussie dollar to 60, and the banks get smoked. Now, the sequencing-- I mean, the RBA cuts, probably, I guess, come first. We're at 150 basis points with the cash rate target. But, of course, the market's already pricing in a couple of rate cuts.
So, it's almost as if now-- just simply to have more of the same, more of this tepid, anemic growth-- which probably does get one or two RBA rate cuts this year-- is what's in the price. To be bullish on Aussie short rates, you need, increasingly, to make recession your base case so they push the cash rate below 1-- which they for sure would in a recession scenario.
The currency give way-- now, what's already interesting about the Aussie dollar is if you look at how it's traded over last six months versus its usual commodity price barometers, it's actually underperformed.
MATT MILSOM: Massively versus iron ore.
GERARD MINACK: Specifically iron ore, but if you took a broader basket, it still underperformed. If you look at how it's performed vis a vis the interest rate differentials-- and I always like to use not the smart, cash rate targets, I use the futures so that captures the anticipation of policy changes. The currency has been stronger than you