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Peter Switzer
Expert
+ About Peter Switzer

About Peter Switzer

Peter Switzer is one of Australia’s leading business and financial commentators, launching his own business 20 years ago. The Switzer Group has since grown into three successful companies spanning media and publishing, financial services and business coaching.

Peter is an award-winning broadcaster, twice runner-up for the Best Current Affairs Commentator award for radio, behind broadcaster Alan Jones. A former lecturer in economics at the University of NSW, Peter is currently:

• weekly columnist for Yahoo!7 Finance
• a regular contributor to The Australian newspaper and ABC radio
• host of his own TV show, Switzer and Grow Your Business, on SKY News Business
• regular host of the Super Show on 2GB radio.

Testimonials

Dear Peter, What fun! You are really very good at what you do. I appreciated our time together and wish you continued success in all you do. Have fun (I know you will).

Jack Welch, former CEO, GE, and ‘Manager of the Century’ (Fortune magazine)


Peter, It was great to have worked with you – you really made the event come alive. I hope you enjoyed yourself. I know Steve Ballmer [CEO, Microsoft Corporation] did.

John Galligan, Director of Corporate Affairs & Citizenship, Microsoft Australia


Here’s a home truth, my only real education – or teacher who I actually ever listen to – is your interviews on Qantas. So thank you with sincere respect.

Sean Ashby, Co-Founder, AussieBum


Peter did a wonderful job on the night; keeping the program moving, working around changes to the run sheet, and ensuring each award recipient, and our sponsors, were made to feel welcome and important.
The feedback received from those attending has all been extremely positive.

Peter Mace, General Manager NSW, Australian Institute of Export


Peter, We would like to congratulate you for performing your master of ceremonies role in such a professional, entertaining and informative manner. We were impressed by your ability to tease out each winner’s story so that the audience gained maximum benefit from their collective business experiences.

Greg Evans and Nicolle Flint, Directors, Australian Chamber of Commerce and Industry


Hi Peter, I listened to you speak this morning and thought you were amazing. I am an accountant and in risk management and have never thought about doing a SWOT on myself – thanks for the tip!

Serife Ibrahim, Stockland Corporation Ltd


Dear Peter, Thank you for your valuable contribution to this year’s forum. Ninety-two per cent of delegates rated your presentation highly, commenting on its useful and topical content.

Catherine Batch, Head of Marketing and Communications, Indue


Peter has facilitated our CEO and CFO symposiums over the last three years. A true professional, he takes away the stresses of hosting and organising an event.

Justine Goss, Strategy Group

US recession looming but Dr Doom says ‘it won’t happen’

Tuesday, July 23, 2019

In the place where optimism is a global export, i.e. the USA, there are big end of town investment banks pondering whether a recession is on the horizon. Ironically, Australia’s own Dr Doom, Professor Steve Keen, can see us slipping into one because of our household debt linked to our property addiction, but he doesn’t think the Yanks are heading down the economic gurgler anytime soon.

(If you want see my latest tussle with Steve, click here to watch last night’s episode of Switzer)

Whipping up interest in a recession (and the bull stock market turning into a damn bear market) is Trump hater and potential Democrat presidential candidate, Elizabeth Warren, an economist at the investment bank Morgan Stanley.

Let’s deal with the less biased view first, that of Morgan Stanley, which is headed up by a little hailed Aussie, James Gorman. James who? We are extraordinary punchers above our international weight, aren’t we?

The investment bank’s economics team thinks the expected July 31 interest rate cut by the Fed could come too late as the seeds of a recession have already been sowed by farmer Trump with his trade war.

But let’s get this view into perspective.

“For now, the path to the bear case of a U.S. recession is still narrow, but not unrealistic,” said MS chief economist, Ellen Zentner.

She thinks the trade war could bring about layoffs and consumer spending cuts but let’s quantify her concerns. She reckons the “credible bear case” is, wait for it, 20%.

So let me take the optimist’s stance on this and argue the chances of no-recession economic growth is 80%.

I could easily say nothing here, so move on, but I do think it’s worthwhile underlining a point that Zentner makes.

“If trade tensions escalate further, our economists see the direct impact of tariffs interacting with the indirect effects of tighter financial conditions and other spillovers, potentially leading consumers to retrench,” she wrote. “Corporates may start laying off workers and cutting capex as margins are hit further and uncertainty rises.”

CNBC explained her scary view this way: “The effects would be a ‘large demand shock’ that would take growth from a projected 2.2% in 2019 to a negative 0.1% in 2020 — a shallow recession but nonetheless a substantial retreat for an economy that grew 2.9% in 2018.”

All this makes me argue that we need Donald Trump to get a trade truce ASAP. And secondly, I’m praying that he doesn’t slam the final tariff slug on the final $US320 billion of Chinese goods that currently aren’t tariffed.

CNBC did also point out that MS is not a lone wolf potential pessimist.

“Morgan Stanley isn’t alone in its recession warning. The New York Fed, which gauges a recession chance by measuring the spread between government bond yields, estimates a 33% chance of a downturn coming in the next 12 months, the highest level since the Great Recession that ended in mid-2009,” Jeff Cox pointed out.

Now to Liz Warren, who’d love to take Trump to the cleaners if she gets the Democrat nomination. The Senator says highly indebted US households could easily give up on spending and, as 70% of US economic growth comes from shoppers, that could really send the States into recession.

However, as Jeff Cox points out, US household debt has risen 50% since 2009 but household net worth has doubled since that time.

Also on another measure, the consumer doesn’t look like a near-term threat to US growth, especially if interest rates fall soon.

“Measured relative to GDP, household debt is below 80%, compared to nearly 100% at the crisis peak. As a percent of disposable income, debt now is around 9.9%, compared to 13.2% in the late-2007 peak,” Cox writes.

On manufacturing, Warren points to two quarters in a row where the index that measures the growth of the sector fell. That said, the actual numbers still suggested that industrial production was growing, albeit at a slower rate.

The latest stats actually show a bounceback for manufacturing.

I don’t think a US recession before November next year’s election will help the Democrats.

Meanwhile, the latest stat, the Philadelphia Fed Manufacturing Index, rebounded in June from a reading of 8 to nearly 22 from June to July. That was a 13 point spike compared to the economists’ guess of only a 4-point rise.

Like it or not but most economists think 2020 will not see a US recession and Steve Dr Doom Keen agrees. His views on Donald Trump, in my interview, were surprisingly unaggressive, which surprised me, knowing him as I have for over 35 years!

I would only change my stance if Donald ups the ante on his trade war and drags it out longer than makes sense. If he does, the Chinese might play a waiting game, hoping that he gets beaten at the election and a more conciliatory US president will cut them a better deal.

They might actually will a US recession on him to see him get clobbered at the November 2021 poll. And that would not be good news for a global-trading economy like Australia!

 

McDonald’s and house prices: lovin’ beats hatin’

Monday, July 22, 2019

The weekend media headlines hailed the rise in auction clearance rates and linked it to banks lending again. Undoubtedly, there are those who would be really annoyed and angry about these statements of fact.

However, this needs to be seen in the context of a billionaire who chooses to go to lunch with an AFR journalist at McDonald’s. Both facts are important for anyone who’d prefer to make money and get richer rather than lose money and get poorer.

There’s a surprisingly strange view for those who seem to want house prices to collapse. I guess these sound of mind people are in a minority, as most us who own homes hope that our investment/asset will rise in value rather than fall.

I suggest if you buy any asset, from a piece of artwork to a stock in a company to a curio in a second-hand shop, you’d kind of hope it goes up in value rather than down. That seems rational.

What gets me in the game of public commentary is when rhetoric becomes so over-used that no one even questions it. A case in point is the way rising property price critics talk about a property ponzi scheme.

There are aspects of property that are linked to spruikers, deceptive developers and industry urgers, which can even be supported by politicians, who over-hype the need for Aussies to own houses. To do so in mid 2017, when the Sydney and Melbourne markets were going price mad, would be a case in point.

However, given recent falls in prices, it seems reasonable to say to would-be buyers that showing up to auctions and home openings isn’t all that crazy.

Of course, those praying for price falls think that we could see another 20-30% fall in prices but these people were wrong in 2009, and could be wrong again.

In my latest interview with Professor Steve Keen for my Switzer TV programme (which is out tonight), he accepts that his home price Armageddon could again be prevented by macroeconomic policies. A day of reckoning is likely to come one day for those over-long property but no one really knows how bad it will be.

And the bottom line is if your job is secure and you happen to overpay for a house you intend to live in for 20 or 30 years, then history and price rises are on your side. It’s ridiculous to believe that all those who invest, buy or speculate in any asset can be protected from economic or market cycles, their own greed or their naivety. You can’t easily protect people from themselves.

Bank haters want to blame the providers of money for people’s dreams but we are accessories before the fact and the reality is the number of people who are damaged for life because they went long property is unbelievably small, compared to those who do well out of it.

Ask those who endured 18% home loan interest rates in the 1980s and lived to see their property prices go through the roof.

And this is where my McDonald’s tale comes in. The AFR looked at a lunch between one of its journalists and Hamish Douglas, a co-founder of Magellan Asset Management, which has been a great investing performer.

Where did they go to eat? They headed for the Golden Arches, of course, in Sydney’s Strand Arcade. Hamish actually likes the food!

He has invested in Maccas and Yum Brands, which owns the likes of KFC and Starbucks. Now all these might be companies with products a lot of parents fear but the reality is that the world goes to these stores on mass. Douglas learnt from Warren Buffett, who invests in what people use daily as that’s a great basis for sales, profits and rising share prices.

This chart shows that despite the good food revolution, McDonald’s share price has defied gravity and its haters.

And despite the property haters concerted campaign against this asset, I think people will line up for real estate as long as Australians like to own the bricks and mortar they live in.

The day that changes is the day property prices will really head earthward but I’m not expecting that any time soon.

 

It’s groundhog day!

Friday, July 19, 2019

It’s groundhog day! Yep, that’s what it’s like for me watching the Oz economy. It’s a guessing game, where you find yourself encountering similar occurrences over and over again, where you’re told you’re wrong over and over again and you have self-doubt, over and over again but eventually you’re right!

It’s my version of Bill Murray’s Groundhog Day, where repeated unwanted data shows up but in my case it’s usually a happy ending. However, until the end-play happens, you’re always left wondering: “Could I be wrong this time?”

I started writing about this strange beast called the Australian economy in 1985 in the Daily Telegraph and because I’ve been on show all that time across newspapers, magazines, radio, TV and now websites as well as podcasts, I should have a good idea of how it’s likely to behave.

However, as I said, this is a strange beast. I’ve never called a recession but I thought Paul Keating was M-A-D letting home loan interest rates go to 17% in the late 1980s. It was crazy stuff but no-one understood deregulated economies.

The Asian currency crisis in late 1997 was one I railed against but I blame BIS Shrapnel’s Frank Gelber, who I interviewed and was converted to his thinking on the subject. And he was right but he made me look good. Maybe guessing the most right economist is a skill for others to use to select who they believe.

The GFC non-recession I got right and I can’t blame anyone else but myself. It got me into heated on air arguments with Carson Scott, my TV colleague on the Sky News Business channel, who decided that other economists were right so I had to be wrong.

Calling the economy like a footie commentator is probably not as exciting but it’s far more important.

What happens to economic growth, unemployment, interest rates and so on really has a massive impact on people’s lives.

Right now, smart economists like Westpac’s Bill Evans and AMP Capital’s Shane Oliver think the economy is weak enough to need another rate cut. They could be proved right or wrong over the next few months. I think it’s 50:50 and this week’s data didn’t change my view. In case you missed it, this is what the stats told us:

• The jobs report was only a pass 5/10 result, with 500 new jobs in June but there were 21,100 full-time jobs replacing 20,600 lost part-time positions. That’s progress.

• Unemployment didn’t rise, staying at 5.2%, which is better than a rise.

The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.5% to 115.8 points. But consumer sentiment is still above the average of 114.4 points held since 2014 and the longer-term average of 113.1 points since 1990.

• On one hand the RBA Governor, Dr Phil Lowe, told us: “I agree 100 per cent with you [the Treasurer Josh Frydenberg] that the Australian economy is growing and the fundamentals are strong,”. But on the other hand, the Board minutes of the RBA said: “The Board would continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.” All up, this means if the economic data isn’t strong by October, the RBA will cut rates again.

Rolling annual passenger growth on the Sydney-Melbourne route is at 6½-year lows.

The Chinese economy grew by 1.6% in the June quarter, above consensus expectations for 1.5%. But the annual growth rate slowed from 6.4% in the March quarter to 6.2% (in-line with consensus) in the June quarter – the weakest pace of growth in at least 27 years. 

• But the good old Chinese shopper is showing us that they will shop until they drop, with retail sales rising at a 9.8% annual rate in the year to June. The consensus forecast was 8.5% and was up from the 8.6% annual rate in the year to May. This was the strongest growth rate in 14 months!

• And the best was saved for last, with the Westpac Leading Index actually surprising economists with a pretty bullish reading on future growth. The often pessimistic AFR reported that “The Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity into the future, has shown a strong turnaround in the month to June driven by the share market gains, better-than-expected dwelling approval numbers and higher commodity prices.”

However, I will add that one month isn’t a trend but I’ll watch this stat with interest in coming months, and so will the RBA.

This wasn’t a great week for the unbridled optimist but I do like the fact that our stock market is up about 20% this year and there are those who warn us that the stock market smarties anticipate the future by about six months. They are not 100% accurate but history seems to rate their predictive powers.

So why do I care? If our economy can rebound from 1.8% growth to high 2% or even 3% growth, the following good stuff happens:

• Jobs are created.

• Wages rise.

• A Budget Surplus gets bigger.

• Confidence spikes.

• A virtuous cycle of economic growth prevails.

• The stock market rises.

• Our super funds keep delivering.

• And optimists like me can feel happy with a job well done.

One day optimism will turn to pessimism but it can be avoided/delayed by enlightened macroeconomic policy settings and an end to the trade war.

And on that subject, the reality of Donald Trump and what he means for predicting our economic future has no role in my Groundhog Day comparison. He is a 24-carat gold one-off when it comes to my history of economic commentary!

 

Keep your hands off our super!

Thursday, July 18, 2019

Keep your stinking, cotton-picking fingers off our super! This was my first reaction to a story that points the finger of blame at APRA for what’s wrong with super.

But that raises a bigger question: what’s wrong with super? Only yesterday, Chant West told us that the median growth fund (i.e. funds with between 61-80% allocation to growth assets such as shares) came through with an impressive 7% return.

And the table above, which was used in an AFR story, shows the best performers over the past financial year. But you have to be careful of one-year wonders, so here are the best performers over the past 10 years:

And I have to say those returns are fantastic, which is another plus for our super system but you also have to remember that we haven’t had a GFC year in those numbers.

Also, you need to be careful comparing super returns because it does depend on what option you’ve chosen. These funds might be 80% growth assets and only 20% defensive. As you play super more carefully, your returns reduce.

These funds above are said to be “growth”, so their returns should be high but when markets crash, they’ll fall harder and further.

Good super funds with a balanced option should come in around 6-7% so those who beat that benchmark consistently should be saluted but those who use them have to understand that they are taking on more risk.

Term deposits up to $250,000 are safe and totally backed by the Government but they pay 2.2% over six months!

Remember, when the returns are high, so are the risks.

On a returns basis alone, regulators don’t have to worry about super, except for those funds that have overcharged and underperformed. But that could be fixed by public exposure and better super education.

For example, we never see tables of the chronic underperforming and overcharging funds. That would help a lot of people get interested in their super.

The super problem we have is that too few people care about their important wealth-building asset. And worse still, they don’t even understand it, which includes someone as smart as entrepreneur Dick Smith!

Dick was quoted yesterday saying he didn’t know he was receiving $500,000 worth of franking credits!

As the SMH’s Michael Koziol told us: “The entrepreneur said he had no idea what franking credits were before discovering the payments, and complained to the Australian Tax Office.”

As our local comedian, Rove McManus, used to often say: “What the #?!!”

I know Dick and he’s no dope but clearly he has left his investment wealth-building and tax affairs to experts but he now isn’t happy about his personal super ‘problem’.

“Labor sold the whole thing incompetently,” Dick said to the SMH. “They should have put a threshold on it, so wealthy people like me would pay the tax, but pensioners and less well-off people would not meet that threshold.”

It looks like Dick will be used as a stalking horse, so franking credits could have another run at an election in the future but it will come with a threshold or cap. The question is: where will the cap be set?

That said, the May 18 election told politicians to tread warily with our super and properties. Ahead of the poll, I interviewed Labor stalwart, Graham Richardson, at our Switzer Investor Strategy Day, which was a week before the election.

Richo was a big supporter of Bill Shorten and he thought he was bound to be our next PM. But when I asked him about the franking credits policy, he simply tagged it: “Dumb.”

He said he was sick of governments of all colours always changing super, treating it as a “milking cow”.

Injustices and exploitation within super should be the domain of our new Super Minister, Jane Hume. But she has to be careful that she doesn’t contemplate rule changes that penalise people who have played by the existing rules, dedicated themselves to diligently saving and setting themselves up so they wouldn’t be living on a pension.

And if you think these people have always had it good tax-wise, in the 1960s the top tax rate was, wait for it, 66.7 cents in the dollar! And they once paid 17% home loan interest rates.

It hasn’t been all beer and skittles!

Adding to my super concerns was the news that the Australian Prudential Regulation Authority (APRA) has agreed to create a super division to regulate super better. An official review by a team led by Graeme Samuel recommends APRA be given greater power to veto the appointment of directors and senior executives to the entities it regulates, including super funds.

The government immediately agreed to all the review’s recommendations and while I rate Mr Samuels, I always worry when governments want to do anything with our super.

 

Your future turns on three Trump things

Wednesday, July 17, 2019

Three events with the fingerprints of US President Donald Trump all over them could send the stock market up or down in coming weeks. At this stage, despite Wall Street being at all-time high levels, the early signs are more positive than negative.

As I write this, the Dow Jones Index has gone negative, thanks to Donald telling us that when it comes to a trade deal, the US and China still “have a long way to go.” Now that could be worrying enough for nervous market players who have to be thinking that a stock market sell off has to be on the cards after such as strong run for stocks since Christmas 2018. This chart below of the S&P/ASX 200 makes the point emphatically.

Source: Google

The three events are:

  1. Cracking a Trump trade truce.
  2. The US central bank cutting its key interest rate.
  3. US companies reporting on how the trade war has affected their businesses.

The first two events don’t need much explaining. President Trump has to avoid an escalation of the trade war because if this happens, Wall Street would sell off and could easily cause a US and then global recession. Donald wants to get elected in November next year and I can’t see a recession good for votes, unless he convinces American voters that they have a “fake recession.”

That said, a longer-than-expected drawing out of these trade negotiations could easily spark a correction for the stock market, where stocks fall 10% or so.

The next help or hindrance for the stock market is an expected interest rate cut from the Fed on July 31. The money market ‘bookies’ have a cut as a 100% certainty. If the central bank welched on the deal, that could easily trigger a stocks sell off. By the way, the actual cutting might lead to a small sell off because there’s a history of stock markets buying shares on the rumour of a rate cut then selling when the news becomes reality. However, it should be more positive for stocks than negative.

Finally, and this is a biggie, the Yanks are in reporting season and this is where the CEO’s ‘love’ for Donald Trump could be objectively tested. You see, it’s clear that few business leaders like to criticize any US President, let alone are tweet-toting Trump but if his trade war is hurting a CEO’s bottom line and profit-making future they will be bound by stock market rules to come clean.

This reporting season could tell us how companies such as Apple and FedEx, which clearly do a lot of stuff in China have been affected but there could be hundreds  of businesses that have been negatively and positively affected by the trade war.

Clearly, a stock market tries to guess the profit futures of US companies, so the fact that market indexes are in all-time high territories says the expectations of the trade war’s wack on profits will be OK but there’s still a bit of guesswork in those kinds of calls.

On the plus side, the early calls on profits from big US financial institutions has been surprisingly good. Goldman Sachs has reported better than expected and its stock price has risen. J.P.Morgan Chase’s results beats estimates, while Johnson & Johnson had a 45% huge jump in profits.

But these are early days, with FactSet saying that only 5% of the companies in the S&P 500 Index has reported, though it’s good to see that 85% have come out with better-than-expected results.

Adding positive fuel to those who have a fire in their belly for stocks, was a speech by the Fed Chairman, Jerome Powell in Paris, where he repeated that his central bank would “act appropriately” to keep economic growth happening.

Powell pointed to “uncertainties”. That was the closest he got to saying that Donald’s trade war has hurt growth in the US, China and the world so a rate cut or two is on the cards.

If the trade war worsens, US rate cuts don’t come and US reporting season shows the trade war is hurting lots of companies, then we could see a serious stock market sell off, sowing the seeds of a global reason that will suck us in.

 

Don’t get too hopeful about a big pay rise!

Tuesday, July 16, 2019

Last week we saw the fastest growth in labour costs in eight years, which really means wage rises are starting to pick up. However a survey of CEOs tells us that two in five workers should not have high expectations about getting a pay increases any time soon!

The AFR looked at a survey of bosses from The Executive Connection and the bottom line was that 37% said they will hold wages where they are or give into a 2% rise, which will basically keep pace with inflation.

But not all CEOs are set to play tightwad, with 33% contemplating a 2-3% pay rise and 14% will be looking at rises of 4% or more.

These are strange days indeed compared to the 1970s and early 1980s when employees got across the board wage rises and then specific industries or trades would get specific pay hikes. It’s even different compared to the pre-GFC days when I can recall arguing with our leadership team about big wage increases in our business. I was told if we don’t increase the pay, we’d lose good people or we wouldn’t attract the employees we need.

Boy, have times changed for many businesses but so has the structure of economies over the past 20 or so years.

Once upon a time, unions ran the labour markets, protected manufacturers had price influence and retailers had virtually no competition from overseas. Taxi drivers didn’t have Uber to deal with, because airfares were so expensive we primarily holidayed at home rather than overseas, and local service businesses weren’t competing with businesses and contractors in The Philippines, Bangladesh and Vietnam.

China hadn’t redefined the cost of everything from T-shirts to electronics and there was no Internet, as well as apps, for consumers to access the greatest deals imaginable. And therein lies the modern day problem.

The businesses paying big pay rises of 14% are either in the tech space, have something pretty unique or still don’t have a real lot of competition. Some individuals are so talented there’s not a boss anywhere who’d want to lose them. And most other bosses would love to lure them to their operations but this covers a small chunk of the workforce.

In a nutshell, the case of Uber explains how the structure of our economy has changed. In an old Australia, no new business could have broken the government-created rules of that taxi business.

The police would have arrested the lawbreakers but those who take on the system are called digital disrupters. And while not all break the law, they challenge conventions, they lower prices, they add competition and make it harder for many employers to make the same growing profits that then provide for decent pay rises.

The classic case is the old situation for power companies, which had few competitors, virtual monopolies in regions, cheap access to power (no one hated coal then) and wage rises were easy to pay out each year.

So we got pay rises but ‘stuff’ cost more to buy. Most people didn’t have a car, let alone a new one. Clothes were expensive, overseas holidays were saved-for-life-projects. Homes didn’t have air conditioning and we sat around a single kerosene heater with jumpers on, which older Australians called “guernseys”.

The consumers of Australia have it so much better than those of yesteryear but it has undermined the ability of local employers to make profits and give wage rises.

I recall Gerry Harvey talking to me about having to pay $28 an hour for a dishwasher on a Sunday night at his resort The Byron at Byron Bay. He didn’t begrudge a young student or backpacker getting the money but he said it was hard to compete against Fijian and Asian resorts where the pay is so low.

The structure of our economy has changed and so have the consumers, the businesses, the technology, the prices and therefore the incomes that come out of it.

Business leaders and politicians have to come up with new ideas to make Australia competitive and that’s where the pay rises will be. But I suspect this slower wage world for the majority is for the long term.

That said, there are some pay offs, such as unbelievably low interest rates and unemployment is a lot lower than the 1970s and 1980s. And we have bigger and more modern homes, even if you are renting. But as with most things, you seldom get good things without paying a price.

And economist Warren Hogan can’t see things changing any time soon.

"This low wage growth story has become a macroeconomic phenomenon around the world and the RBA is starting to put it at the centre of their monetary policy," he said. “With the surprising level of businesses increasing the amount of investment in automation I think that tells you wage growth into the future will also be less.” (AFR)

 

Could an architect know something we don’t know about the economy?

Monday, July 15, 2019

I bumped into a former student of mine who is a pretty successful architect, who gave me an interesting take on our struggling Aussie economy. It comes when the likes of the AFR is headlining observations like: “Crowds of buyers turn out in Sydney and Melbourne.”

And Su-Lin Tan went further with: “The revival in home-buying demand across Sydney and Melbourne shows no signs of letting up although the key test for the market won't come until spring, which is expected to bring a surge in properties for sale.”

This is a big change from the stuff we saw from the AFR over the past two years!

After a pretty bad week of economic data, where both business and consumer confidence disappointed, the question is: can we expect the data flow will pick up over the next two months? That’s how long it should take to get a good handle on whether we can gamble on an economic recovery.

June and July data can be influenced by the pre-election May anxiety, so I’d like to see the August and September official economic numbers before declaring myself a winner or loser in the tipping caper.

A decade ago when I was working with James Valentine of ABC radio at Sydney’s 702, Australia was in a housing construction as well as an economic downturn and we needed to see a comeback for the housing sector to believe the economy could turnaround.

I decided to look for alternative economic indicators and my favourite was the “portaloo index”. My thinking was that before a building project kicks off, the first thing needed on site is a loo for workers so I rang around the big suppliers like Coates and Kennards and to my surprise there had been a nice pick up in dunny rentals!

Of course, cranes on the cityscape is a good sign for current activity but I wanted to see some good predictors give me good or bad news. James liked what I came up with and asked listeners to give us their best forward economic indicators. One caller was celebrity, lefty and speech writer, the late Bob Ellis, who reckoned the number of Ferraris in the car park at the Newport Alms at Newport in Sydney was a reliable one and he made the remark that “there was a ‘shitload’ there today!” That was a typical ‘Ellisism’.

Back to my architect buddy and he didn’t surprise me when I asked how business has been lately.

He said “it’s been shocking for two years ever since the banks took his potential customer base out of the frame.”

However, he shocked me again with this: “But I got 18 inquiries last week!”

He made the point that “we are the frontline for building projects” so he and his picture-drawing colleagues might be better indicators than builders’ dunnies! (Apologies, Alex.)

Winter isn’t usually good for property sales but the preliminary weekly auction clearance rates for Sydney and Melbourne were 77.2% and 73.6% respectively, compared with last year's rates of 46.9% and 56.2% if you can believe the AFR and CoreLogic.

It comes with a small rise in business conditions last week and a good jump in job ads with the ANZ job advertisements survey showing a rise of 4.6% in June, the biggest monthly gain in 18 months!

And I can’t ignore the monthly reading of labour costs, which grew at a 1.5% quarterly rate in June, the strongest growth rate in eight years.

This is all good but these numbers could turn around in a month because history has taught me not to trust one month’s data.

That said, I have seen seven months of data that I can’t ignore and that’s the time when our stock market has surged over 20%! Sure, you can’t trust stock markets because before a crash we’ve often seen a huge spike followed by a collapse of share prices.

As the old market saying goes: “Shares go up by the stairs and down by the elevator!” However, we also often say that a stock market latches on to what might happen in six months’ time, so maybe this 20% surge is a whole bunch of smarties who can see what a lot of normal people can’t see.

Let’s hope the smart men and women of the stock market world are on the money. If that’s so, my architect friend might see a bit more business as the investment bankers put their profits to work in bigger and better homes.

That’s one of the ironies of stocks — when I took my TV show to New York and interviewed the CEO of the biggest real estate business in the Big Apple, she said when Wall Street guns get their bonuses they put it into property!

Let’s hope the architect’s view on the economy teaches my colleague economists a thing or two.

 

Looking for good news

Friday, July 12, 2019

Let’s face it, this week’s data drop was a shocker and increased the chance of the Reserve Bank cutting interest rates again on Cup Day or even before, if next month’s stats telling us about the economy’s health don’t pick up.

That said, there is reason to give the economy a chance to benefit from two interest rate cuts, soon-to-be-delivered tax rebates, a minimum wage rise and other pluses like the dollar around 70 US cents. Sometimes you have to give an economy (and the people who live, consume and work in it) time to be influenced by the stimulants thrown at them by governments, overseas customers for our exports and the RBA.

As I pointed out yesterday, consumer confidence and business confidence readings were disappointing but I’m sure the RBA’s Dr Phil Lowe would want to wait for a few months before pronouncing that the body economic is in a deathly, un-recovering state.

However, there was some good news. Let me share that with you in case you’re negatively affected by the negative news. Here goes:

• While the value of owner-occupier home loans fell by 2.7% in May, with investment loans down 1.7% (in seasonally-adjusted terms) the share of first-home buyers in the home lending market hit a near 7-year high of 28.6%. (Also this was May when the Bill Shorten effect on property was still operational, with his negative gearing and capital gains tax promised changes.)

• While the Westpac measure of consumer confidence dropped, the same survey revealed that the ‘time to buy a dwelling’ index rose by 5.4% to 123.2 points in July – the highest level in four years.

• The ANZ consumer survey told us the measure of family finances compared with a year ago (‘current finances’) rose by 3.7% to +13 points – the highest level in five months. 

• The monthly reading of labour costs out of the NAB business survey grew at a 1.5% quarterly rate in June – the strongest growth rate in eight years. This is an overdue good sign for wage rises.

• The NAB survey also said that business conditions, which tells you what business is saying about what it’s like in the shop, the office, the factory, etc., rose  from 1.2 to 3.4.

Let’s hope this is an omen for the future.

• ANZ job advertisements rose by 4.6% in June - the biggest monthly gain in 18 months.

• The national average retail unleaded petrol price has fallen by 3.4% to 140.5 cents a litre over the year to July 7.

CommSec’s Craig James joined me in the optimists’ club by pointing out that “on the wealth side of the equation, Aussie shares (S&P/ASX200 Index) are up by nearly 6% over the past year – not far off 11½-year highs. And property prices in Sydney and Melbourne are showing tentative signs of stabilisation after falling for around two years.”

Economies can confound even the experts but I’ve learnt over the years that they can be slow to react to good and bad news, so I’m sticking to my view that a second-half rebound is probable. I guess the stock market that’s up 21% year-to-date is agreeing with me!

 

Is our economy in a death spiral that ScoMo has to rescue?

Thursday, July 11, 2019

Optimists were given a torrid time by consumers and businesses this week, which raises two important questions. The first has to be: is  our economy in a death spiral? And the second is: does ScoMo and Treasurer Josh Frydenberg have to reconsider their refusal to use their looming budget surplus to rescue the economy?

The answer to the first pretty well gives you the answer to the second.

Let’s examine the economic data out this week, which has been less positive than what we saw last week.

On Tuesday, the NAB business survey showed the positive ScoMo effect on business confidence was short lived. The business confidence index fell from 10-month highs of +7.3 points in May to +2.2 points in June. To understand this number, you should know that the long-term average is +5.9 points. That was a disappointing take on what businesses are expecting going forward. However the business conditions index, which evaluates how business is “right now” actually rose from +1.2 points in May to +3.4 points in June. But the long-term average is +5.8 points, so it’s still not great news. It’s just OK news.

Then on Wednesday, the Westpac consumer sentiment number for July was an absolute shocker. The monthly index fell by 4.1% to 96.5 points in July – the lowest level since August 2017! Adding insult to injury, the result is below the longer-term average of 101.5 points. A reading below 100 points tells us that pessimists are outnumbering optimists!

This has led ‘rational’ people to ask: how cold this negativity prevail following the surprise ScoMo win, two interest rate cuts, a tax rebate on the way, a minimum wage rise and a stock market sneaking towards an all-time high?

Well, it could be that the untrained economist in many Aussies is asking: why is the RBA so desperate to cut rates? And why is the Treasurer throwing quickie tax rebates at us?

These desperate rescue actions by the masters of monetary and budgetary policies might be spooking consumers and businesses!

That’s one possibility that might be relevant to a lot of my thoughtful countrymen and women. But there could be another piece of economist-rationalisation to explain this horrible week for data.

Yep, it might be too early to expect consumers to react to interest rate cuts that haven’t actually had time to impact their bank balances. Meanwhile, no one has actually received a tax rebate yet, so we might need to give consumers a couple of months before we pronounce them “dead” as potential contributors to the economy in need of a rebound in growth.

That’s the bad news. Is there any good news worth crowing about?

Well, yes, but it depends on who you are.

The NAB survey showed that the monthly reading of labour costs grew at a 1.5% quarterly rate in June, the strongest growth rate in eight years!

Now that’s good for wage earners and this has been a big problem for the economy. But this cost rise could explain why some businesses are less confident. That said, wages rising to lift consumer spirits should ultimately help businesses, provided those with pay rises don’t spend the money online and overseas!

Meanwhile, the ANZ weekly look at consumer sentiment found the measure of family finances compared with a year ago (‘current finances’) rose by 3.7% to +13 points, which was the highest level in five months. 

My best guess is that it’s too early to tell but if these business and consumer numbers don’t pick up over the next two months, then the economy is in worse shape than I thought and the ScoMo effect is a lot less long-lasting than I’d imagined.

However, if we don’t see a pickup in that time frame, Josh will have to give up his surplus to avoid a death spiral into a recession. The irony is that if a recession shows up, then the surplus is automatically killed off by rising dole queues and less taxes from those who lose their jobs.

And if that happens, those hoping for more house price falls will see their wish come true and that will hurt a lot of state government budgets, which rely heavily on a healthy property market.

 

Don’t shoot me. I’m just the economic messenger

Wednesday, July 10, 2019

Today we get to see the Westpac consumer sentiment number and ScoMo and his Treasurer, Josh Frydenberg would love to see a nice rise. So would business owners and anyone who likes the idea of job security, so keep your fingers crossed.

Yesterday we saw the NAB business conditions index, which rose from +1.2 points in May to +3.4 points in June. That says businesses are feeling better about their business right now. However, business confidence dropped when I would’ve loved to see a spike but maybe that was too high an expectation.

You see, straight after the election result, business confidence spiked from 2 to 7, showing how business loved the ScoMo win. But it has dropped back to 2, but that’s better than what it was pre-election, with readings such as 0.1 and zero. Clearly, business wants to see some real economic growth results before it becomes permanently positively charged.

One of the toughest aspects of my ‘job’ is to make calls on what should happen to a market. And when you do it, not only for financial planning clients but also in the public arena for this website and for our Switzer Report clients, as well as on radio and Sky News on Fridays, the pressure’s on to be right.

Calling an end to rising house prices in Sydney and Melbourne was pretty easy after the booms in both cities surged into 2017, after four years of big rises previously. It was like telling beguiled bitcoin watchers what was likely to happen to the $20,000 plus price level it hit in 2017, so tipping that gravity would take over wasn’t a big punt.

In contrast, tipping when the house price fall ends is harder. The experts at CoreLogic think that a bottom is forming, after Sydney has lost 15% and Melbourne 11%. But any major economic problem from overseas or even locally could force prices down again.

For those who don’t want to contemplate such a thing, Donald Trump’s harassment of the Fed boss, Jerome Powell, means he could easily cut interest rates on July 31, despite a surprisingly great jobs number last Friday.

The 224,000 jobs created in June (when economists expected 160,000) should make a central bank pause when it comes to rate cuts because forecasts of a slowing US economy might have been exaggerated. However, a cut now (possibly when it’s not needed) could help restimulate growth, assist that restrained inflation rate to get going again and, ultimately, create a boom that will require interest rate rises.

The Fed could also be worried that Donald’s trade war could ultimately slow the US economy down so a rate cut could lean against the negatives coming out of the Trump battle with China.

By the way, it will be a big surprise if the Fed runs away from an expected cut. “The probability of a cut remains at 100%, with a 94% chance of being lowered by 25 basis points, according to the CME FedWatch tool,” CNN reported yesterday.

The news agency talked to Steven Ricchiuto, US Chief Economist at Mizuho Americas, ahead of Powell delivering his biannual testimony on Wednesday morning US time. “The markets are likely to further walk back rate cut expectations after the upcoming semi-annual monetary policy report scheduled to be delivered by Chairman Powell,” he said.

“Although the monetary policy report already delivered to Congress clearly states that the Fed will do what is necessary to ensure a sustained expansion, the Chairman can assure Congress that the economy currently looks healthy.”

Looking at the probable surprising, better-than-expected health of the US economy and given the likelihood of a rate cut, then the market forecasts of US profits rising 11% next year make more sense. And it makes someone like me think a 2020 US recession and big stock market sell off might end up being more likely in 2021 (or even 2022), after the US election.

Donald has made my economic guesswork a whole lot harder than usual because this guy is simply so unusual.

From an Aussie point of view, a faster growing US economy helps our growth. A trade deal, which looks harder to see happening soon, will also help, though China’s stimulation to offset the tariff’s impact has helped us create a record trade surplus. Unbelievably, high iron ore prices (due to the tailings dam tragedy in Brazil) have also pushed iron ore prices higher.

Meanwhile, tax cuts, rate cuts, minimum wage rises, infrastructure spending and easier bank lending should help our economy pick up as well. And what about the surprise jump in wages in June, with the monthly reading of labour costs growing at a 1.5% quarterly rate in June, which is the strongest growth rate in 8 years! Who saw that coming? Let’s hope it’s a sign that wages are starting to pick up.

This should assist in preventing a huge house price slump of a 40% kind but we can’t rule out a black swan event that shocks the world economy. If such an unexpected event shows up, then maybe those praying for a doomsday house price slump will have their prayers answered!

Right now, as the economic crystal ball messenger, I’m betting against the Armageddon scenario. But in this game, you can’t be up yourself and overconfident with your predictions. (That’s a lesson some of my critics need to learn.)

But you have to remember crystal balls can be deceptive (just like tea leaves), so don’t be too trigger happy when you don’t like the economic story that seems to be playing out. And that’s because when it comes to economic stories, they can turn on a dime. And with his testimony, Jerome Powell could flip a really important coin today.

 

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