Risks are mounting Are you a victim or a victor? ‘Good news’ from Venezuela
By Selva Freigedo in Albert Park The Reserve Bank of Australia (RBA) left rates unchanged once again last week. Rates have stayed stuck at 1.5% for two years now. The RBA also released its Statement of Monetary Policy last Friday. The 74-page document gives some interesting insights into the RBA’s current thinking. And, as it showed, the economy is a mixed bag. As you can see in the graph below, the RBA expects GDP growth to increase at an average rate of 3.25% per year. That is until 2020, when it will ease to 3%. They also expect the unemployment rate to decrease slowly from 5.5% to 5% by the end of 2020. ..............................Advertisement.............................. THIS strange 10 second clip could be the genesis of a medical revolution. One cancer expert has already dubbed it: ‘...the Holy Grail we're looking for’. | |
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Yet, while they expect unemployment to decline, the bank doesn’t see inflation picking up anytime soon. In fact, they have reduced their forecast to 1.75% by the end of this year and are looking at inflation to reach 2.25% by 2020. That is the lower end of the RBA’s 2–3% target band. With inflation staying put, ‘the Board does not see a strong case to adjust the cash rate in the near term.’ That is, we are looking at low interest rates for a while. The main culprit for low inflation is wage growth. While unemployment has been decreasing, wages have remained low. As the RBA noted: ‘Wages growth continues to be low and stable across most industries and states. Several factors have contributed to low wages growth including spare capacity in the labour market, and the process of adjustment to the end of the mining boom. Low wages growth has weighed on inflation because wages are the largest component of business costs. In turn, low inflation and expectations that inflation will remain low in the near term have weighed on wages growth.’ In my opinion, one of the explanations for the low wage growth could be underemployment. That is, people that want to work more hours but can’t get them. As the RBA noted, most of the increase in employment this year was in part-time employment. Australia isn’t an isolated incident. While unemployment has decreased in most developed countries, wage growth hasn’t picked up. The worry with wages not picking up is that it could affect household consumption. A large proportion of Australia’s growth comes from consumer spending. With wage growth staying put, households have been increasingly taking on more debt. Savings have also dipped. Now house prices are falling. As you can see in the graph below, household net wealth has decreased along with house price falls. And, while we have seen strong property prices in recent years, the fall in prices could very well affect household spending. As the RBA noted (emphasis mine) ‘The high level of household debt also remains a key consideration for household consumption. For example, a highly indebted household facing weaker growth in disposable income or wealth than they had expected may respond by reducing consumption. Consumption growth may also be lower for a time if households concerned about their debt levels choose to pay down debt more quickly rather than consume out of additional income. […] ‘[H]ousing assets account for around 55 per cent of total household assets, so lower housing prices could lead to lower consumption growth than is currently forecast. Although the earlier gains in national housing wealth may not have encouraged much additional consumption, it is possible that the consumption decisions of highly indebted and/or credit-constrained households could be more sensitive to declines in housing prices than to the previous increases.’ The bank sees solid global economic growth and has a positive outlook, yet they also see some ‘important uncertainties,’ mainly coming from abroad. For one, protectionism in an increasing threat. As they noted: ‘While the outlook is largely unchanged from the May Statement on Monetary Policy, the downside risks to global growth from trade protectionism have increased. […]The risk is that an increase in protectionist measures could materially weaken the investment outlook and may weigh on confidence and financial market conditions more generally.’ There is also the risk that the US sees stronger growth than expected. In the US, while the unemployment rate is at record lows, it has also benefited from a tax cut. Strong growth could mean higher inflation. Which could mean that the US Federal Reserve increases rates faster than expected. As the RBA noted: ‘While the risks to global growth from trade protection policies have increased, there are also other important uncertainties. A continuation of solid growth and further absorption of spare capacity – particularly in some major advanced economies – could result in inflation picking up more quickly than is currently expected. This would have implications for monetary policies and financial markets.’ And there are also concerns with China, Australia’s main trading partner. As the bank wrote: ‘The risks to global growth from trade protectionism have increased. In light of this, and recent policy actions by Chinese authorities to manage financial risks and slowing growth, there is uncertainty about the outlook for China, which is a key trading partner for Australia.’ The RBA has repeated that the next interest rate move will be up. Yet, as long as inflation stays low, there is not much reasoning for an increase. And, risks are mounting up. Wage growth is barely increasing, property prices are falling and households have a lot of debt, which could slow consumption. At the same time, there are concerns with increasing protectionism, inflation picking up in the US and a slowdown in China. Unless inflation picks up, any deterioration could see the next interest rate move going down, not up. Best, Selva Freigedo, Editor, Markets & Money PS: Author and economist Harry Dent thinks the next economic upheaval is at our doorstep…and has a chilling warning for Australia in his new book Zero Hour. 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Are You a Victim or a Victor? By Vern Gowdie in Helsinki, Finland We’re approaching the 10th anniversary of the Lehman Brothers’ collapse. The last decade has been like no other in financial markets. Never before in history have central banks been so actively involved in supporting asset prices. This was all done in the name of ‘trickle down economics’…the wealth effect would filter down through the economy. Well, the theory is fine, but in practice it hasn’t worked. The rich are getting richer and the rest are stagnating. The other day, the US Federal Reserve reported that the top 1% controlled 38.6% of the wealth in the US in 2016. Whereas, the bottom 90% held 22.8% of the wealth. If the objective of the Fed’s policies was to spread the wealth around, then, by its own numbers, it has been a dismal failure. But we already knew that. Over the past decade, the divide between the haves and have nots has never been wider. Rest assured, in due course, the markets will close the gap. After a decade of stimulus, you’d think we would have economic lift off, but the central banks have got very little bang for their buck. The following headline is from a recent ABC News story… Here’s an extract… ‘The Government keeps reassuring workers that wage growth is just around the corner — as long as strong employment growth continues. ‘The logic is simple: the more Australians that find work, the tighter the labour market becomes, and the easier it is to bargain for a pay rise. ‘But a leading investment bank has warned that even its most far-reaching economic forecasts show no meaningful change in the unemployment rate.’ Despite all the reassurance that growth is ‘just around the corner’, it’s proven to be a very long and arcing journey. The reality is a good chunk of the newly minted wealth is trapped at the top end…compounding on the balance sheets of the one percenters. The vast majority of the economic activity is driven by the 90%ers. Those who go to work, pay the bills, try to save a little and make a dollar stretch further. Competition is fierce for this dollar. Hence, the permanent ‘SALE’ signs in shop windows and the closure of retail chains. The disposable dollar is not being disposed of as easily these days. People are looking for bargains. Invariably, lower margins means more manufacturing is outsourced to countries with low labour costs. This price reduction dynamic filters its way through the economic food chain. Which is why we have stagnating wages in the developed world. As soon as wages get too high here, the work is outsourced to a lower cost nation or automation is introduced into the workplace. Employment growth — as measured by the Australian Bureau of Statistics (ABS) — is fake news. The definition of ‘employed’ is a joke. A more accurate reading on Australia’s ‘un and under’ employed is produced by Roy Morgan Research…you can find the latest data here. Roy Morgan Research uses a ‘pub test’ definition for employment…not this ‘one hour per week’ rubbish the ABS deems as statistically ‘employed’. According to the June 2018 report published by Roy Morgan Research, the Un and Under employed figure is 18.4%. Prior to the GFC in 2008, the figure was around 11–12%. How can the government possibly make reassuring statements and sound decisions based on inaccurate data? The investment bank (quoted in the ABC article) is right, there is no meaningful change to employment in the future…there is simply too much slack in the labour market. The RBA will keep rates on hold for two reasons. Firstly, the economy is not doing as well as they tell us. Secondly, and more importantly, the RBA encouraged far too many people to take on far too much debt. Raising rates would expose the folly of this short-sighted growth ‘at-all-cost’ policy. The following chart, on how our household debt compares to other major nations, has the RBA’s finger prints all over it. And it’s the ‘onward and upward’ trajectory of that red line that reveals the secret behind our record breaking recession-free run. We have simply borrowed our way to economic ‘prosperity’. Our GDP numbers are yet another example of ‘fake news’. All that ‘so-called’ economic growth is nothing more than a reflection of our nation’s willingness to go deeper into debt. The official cash rate will remain at 1.5% for now. Contrary to popular belief, expect the next movement in rates to be down NOT up. The RBA has painted itself into a corner with its blind pursuit of economic growth. Shame on them for being so short-sighted and data driven. Why rates are going down not up There are simply too many deflationary forces in the global economy. China cannot keep expanding its debt base at the same rate as it did over the past decade. With an excess capacity to produce ‘things’, all it’ll take is a tightening in credit markets for China’s factories to go into overdrive (to generate cashflow to meet loan obligations) and export deflation around the globe. Boomers are 10 years older than when the last credit crisis hit. On a daily basis, more boomers are moving into retirement…spending less and borrowing less. Millennials — burdened with student debt — are incapable of picking up the borrowing slack created by retiring boomers. Private and public pension funds are woefully underfunded. When the next crisis hits and this charade of having nearly enough capital to meet promised payments is exposed, tough decisions are going be made on how deep the cuts to pensions need to be. Retirees with even less money to spend is not good for GDP growth…or public confidence. Higher energy prices take a bigger slice out of household discretionary income pie. Which means there’s less money available to spend on the ‘nice to haves’. And, unofficial rates are on the rise. Home loan rates are being increased due to banks facing higher funding costs. The flood of cheap money, supplied by central banks over the past decade, has largely been stored in the dams of the wealthy. Some has trickled out, but not enough to float all boats higher. Many households are stranded in a stagnant pool…going nowhere fast. Bailing out just to stay afloat…as evidenced by this headline from Macro Business on 5 July 2018.. A rise in home loan interest rates will, literally, sink them. Overly indebted households. Stagnant wages. Stubbornly high un and under employment. Global debt is US$100 trillion more than it was in 2008. Rising fixed costs…energy, Government charges, insurances. A widening of the divide between the haves and have nots. The most expensive asset markets in history. This is the sad and sorry state we find ourselves in after a decade of stimulus. In a fair and just world, central bankers would be held accountable for such a disastrous outcome. How — by any stretch of the imagination — do you possibly conceive and believe that the cure for a debt crisis is more debt? In any court, the findings against these serial bubble-blowers would be damning. But we know this is not going to happen…at least not until the next crisis hits and the public demands that heads should roll. By then it’ll be too little, too late. The damage will have been done. When the cycle turns from expansion to contraction, there will be two types of investors…victims and victors. Victims will lose money and sleep. They’ll spend their time involved in class actions, advocacy against institutional negligence and lamenting how silly they were for buying into the illusion of prosperity. Whereas, to the victors go the spoils. They’ll devote their energy to identifying how best to deploy their capital into a deeply discounted market. If any sleep is lost, it’ll be due to the excitement associated with endless opportunities. Which one are you going to be? Regards, Vern Gowdie, Editor, The Gowdie Letter ..............................Advertisement.............................. MUST READ… Discover how everyday Australian’s are taking advantage of an untapped market that made investors like Warren Buffett and Peter Lynch household names. Download your FREE REPORT now, and discover the… LATEST generation of ASX 10-baggers | ..........................................................................
‘Good News’ From Venezuela… By Bill Bonner in Poitou, France Here at the Diary, we walk on the sunny side of the street, even at night. So today, we look at the bright side of bad news. Accidental healthcare For example, yesterday we saw what a disaster the Nicolás Maduro government has made of Venezuela. Consumer prices may be rising at a million percent per year…which must be hard to measure, because there are so few consumer items to buy. The shelves are nearly empty. But did this ill wind blow no one good? Of course not. Venezuela’s accidental healthcare initiative is a stunning success. As reported in Newsweek, last year, the average person in the country lost 24 pounds. That was after he shed 19 pounds the year before. This weight-loss program is extremely effective. But we caution Venezuela’s ruling elite to take a glance at our book, Hormegeddon. In it, we demonstrate how the law of diminishing returns can apply to almost any aspect of society: politics, the economy, finance, etc. Push a good thing too far, we wrote, and the returns not only diminish, they reverse. Hormegeddon explains why Maduro may not want to take things too far. It’s one thing to lose a little weight. It’s quite another to starve to death. Radical weight loss is something Americans can look forward to. We don’t know how long it will take to get there, but Venezuela shows us what a determined government can do. When bad politics takes over a good economy, it is just a matter of time until the shelves are empty and the fat comes off. Huge cost You, dear reader, may point out that this weight-loss program comes at a huge cost. Government policies in Caracas have put 90% of the population on the poor side of the poverty line. And, of course, those are the people who lost weight. But the good news is…they are also the people who probably needed to lose a few pounds. In America, too, a nationwide financial catastrophe would have its upside. The richest one percent has notoriously captured most of the income and wealth gains of the 21st century. On the income ledger, it had about 17% of national income going into the century. Now, it has about 20%. And on the balance sheet, household wealth was larded by some $60 trillion since 1999 — overwhelmingly going to the wealthy (who own stocks, bonds, and real estate). Of that $60 trillion added since the dawn of the millennium, a disproportionate share has gone into the pockets of the wealthiest. Now, the ‘One Percent’ owns about 40% of the entire stock market wealth of the country. Does ‘inequality’ bother you? More good news: You don’t have to worry about it…We will soon get ‘disaster relief.’ Which is to say, the coming crash will take care of it. That’s the upside of the downside. Wrongs get righted. The mighty are brought low. The meek are lifted up. The rich in America were the unwitting, but very willing, recipients of the feds’ stolen goods. In the coming crisis, the poor may lose weight…but the rich will lose their ill-gotten gains. One of the subtle scams of the fake-money system is the way it steals wealth from people without them realizing it. The poor feel like failures. The rich think they are geniuses. Both are duped by their own money system. The feds put in fake money. As Joe Withrow showed recently, the Fed has pumped more than $4 trillion — money created from nothing — into the system since 2008. This added nearly $20 trillion to stock market prices alone. But real wages and salaries remained the same. If you had financial assets, in other words, you got rich. But there are still only 24 hours in a day; so if you had only your time to sell, you got nothing. Hell in a handcart The One Percent of Caracas has bank accounts in Miami. As Venezuela goes to hell in a handcart, the rich are protected. But America’s rich are stuck. Their wealth is in dollars…and in inflated US stocks, bonds, and real estate. They won’t escape. Which brings us to more good news: Donald Trump’s trade war. Of course, it is absurd and disastrous from an economic point of view. Here’s Harvard professor and conservative economist Robert Barro in The Wall Street Journal: ‘The underlying mercantilist view — that there is no downside to cutting off imports because our benefits from international trade arise only from what we sell — is, frankly, ridiculous. ‘Living without foreign-produced goods hurts Americans more than our trading partners. And the calculations only get worse when one factors in the inevitable retaliation. Foreign countries have already begun restricting U.S. exports. They are also entering into free-trade arrangements that exclude the U.S. It is hard to complain about Japan expanding trade with other Asian countries or the European Union, but this expansion comes partly at the expense of U.S. exports.’ There must be an upside. But where? It is right there in front of us. The trade war — if pursued — is likely to bring the high-flying One Percent down to earth…and wreck the entire capital structure. The entire $60 trillion that was gained in the 21st century could get whacked. Most to lose Wealth is relative. While everyone will end up poorer from a trade war, those who would lose the most are those who have the most to lose. What came so easily will go away just as easily. Remember, ‘money’ is just a way of keeping score. Long-time Diary readers may remember this idea from our parking ticket explanation. The rich grew rich ‘on paper’…They had more of a claim against the cars, houses, factories, land, furniture, and time of others — everything we regard as real wealth. Which is why most people might actually prefer a trade war. Even though it would make the country poorer as a whole, it would hit the rich harder than the poor, leaving the latter relatively less poor. That is also why we argued that a real, serious trade war was unlikely. The One Percent stole its wealth fair and square. It won’t want to give it up. And it is among this One Percent that you’ll find both the Deep State and The Donald himself. When they realised what was at stake, we expected a clever insider would have a word with the president and clue him in. But now, we’re not so sure. Mistakes are made. Accidents happen, even those with surprising upsides. Trump is now threatening $500 billion worth of Chinese imports. The Chinese are vowing retaliation. Mr Barro continues: ‘At first I thought the president’s rhetoric about trade restrictions wouldn’t be translated into major action. But it is now clear that he, reinforced particularly by Commerce Secretary Wilbur Ross, is committed to a trade war. This policy constitutes a serious depression risk, analogous to that from the Smoot-Hawley Tariff of the 1930s. […] ‘Mr. Trump doesn’t deserve to be impeached for his myriad instances of political incorrectness, but he may deserve to be impeached for his trade war.’ Our advice to the One Percent: Get out while the getting is good…Turn some of your ‘paper’ assets into real assets while you still can. Regards, Bill Bonner ..............................Advertisement.............................. DON’T BUY GOLD Click here to discover an obscure gold ‘manoeuvre’ — unknown to the wider investing public — that could multiply your gold gains by a factor of 20 | ..........................................................................
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