Personal Thoughts of Bernhard Kirschner as at 24 December 2008
on the future of the Australian Economy - just an experiment to see how right or wrong I am!
Where to Australia?
We are being talked into an unnecessary recession, not that an occasional recession is all bad.
The talk.
When the press (including electronic) use expressions that "real growth has dropped by 30%" it means that we are still growing, but by less. What we hear and understand in our perceptions is that there is a 30% drop, not in growth, but in total production.
If growth has dropped by 30%, we are still growing by 70% of the previous growth, and if we were all doing well before, we should on average all be better off than last year, since the total is still bigger.
Even if there is less, no or negative growth, we are still doing better than the year before.
Remember that governments thrive in crisis, as it gives the leaders an opportunity to show their leadership, and unites the people behind them. There was the war on drugs, the war on poverty, the war on terrorism, all lost, but great for speeches. Expect speeches next year how government action prevented a recession!
The press sells more papers when there is crisis news, and various spokespersons thrive when there is fear and uncertainty.
As Australians we also have a habit of attacking our tall poppies, and our healthy economy has been attacked.
The economy
The Australian economy was in decline from at least late 2007. See, I am even doing it. It was not in decline, just that the rate of growth was declining, due to higher petrol prices, unnecessary interest rate rises, wasteful management and structural change.
Petrol has now dropped adding about $50 per week to the average household, which is over $5 billion at least a year, never mind the savings in manufacturing and transport costs that can be used to offset higher costs of imports. Interest rates are down, adding about $30 per week to 1/3 of Australian households, and the government has taken $11 billion of the taxes we have paid and redistributed it to the poorest, which I agree with ethically, but am unsure economically. Imports will cost more, (less savings in oil used and transport costs,) so demand will switch where possible to local purchases. Commodities may be down in demand and cost, but will produce almost 50% more Australian $ income. We had our biggest trade surplus of $3 billion last month, but because the news did not fit the mold, it was ignored.
I predict that this Xmas and post Xmas retail sales will be the best ever, (guess who will claim the credit), causing a sudden surge in optimism, resulting in the effects described below.
The Government has acted to stimulate demand for short term gain, but possible long term pain through distorting demand.
So what is the problem?
Structural change is happening all the time. Even in times of growth, some sectors of the economy are shrinking. With high growth these sectors still do OK, but at the first growth fall, they suffer severely.
Many of these sectors were suffering before the financial meltdown, but were able to absorb the drop. When sources of cheap finance dried up, many had to cut down, or even fail. Woolworth in the UK, Walmart in the USA were in trouble from excessive expansion before the financial meltdown.
Another example is Channel 10, whose figures fell by 12% in July to September, before the financial meltdown, and they will suffer more as advertising moves to the internet, but the blame will be shifted to the economy.
Mobile phone sales will drop as the the early adopters who want to grab the phones with new features are satisfied, and the rest are happy with their current phone.
Clothing will suffer because a purchase can always be postponed, as are new cars. Fine dining will suffer as people cut back, as they do not want to be perceived as being reckless with their money.
Home entertainment will grow, taxes will soon grow.
The banks
Some banks were playing musical chairs with highly inflated assets, and the music eventually had to stop, so many of the high profile overpaid players are now out of the game. I personally feel for the individuals, whose lifestyles are now affected, but their services were not adding anything to the economy except hot air, and we have enough of that with global warming!
Opportunism
Many organisations are using the opportunity of the tough times talk to shed staff that they dared not shed before. With tough times, they do not antagonise unions, other staff, and the public by cutting back. They are able to explain that that are acting being prudently!
In the good times, there is bloat. With growth in the past few years management has not concentrated on efficiency, often employing and planning for future growing demand, causing present inefficiencies. This is a great time to use the tough economy excuse to get rid of deadwood, cut costs, examine systems, and generally improve the business for the future. This is one recession benefit for the future economy, but hard on individuals,
The Aus$
It is totally illogical for the A$ to drop. It should have risen, and I predict a 70% chance of Aus$.75 to US$ by March, and .85 by June, and a 30% chance of parity at some time during 2009. One of the main reasons that the Aus$ dropped was the currency speculators following the fall. If you want to understand how this works see http://www.xe.com/ucc/ and try their currency speculation game. I believe that the lowest point for the Aus$ was November 2008.
The Australian stock market
It is totally illogical for the Australian stock market to drop as far as it has. With such high returns, and low interest rates, it will go up, suddenly. Investors earning almost nothing in the bank will start entering the market soon; especially if they think that the bottom has been reached.
Although there will be some profit falls, most companies will do well. Watch how well the banks do by the end of 2009.
I predict a 50% chance of the all ordinaries index reaching 4000 by April, and 5,000 at some time during 2009. The lowest point for the Australian stock market was November 2008. The only reason for a fall in present values would be a political or disaster event.
As fast as the fall, so will be the rise, although not to 6,000 for some time. This will be the fastest stock market recovery in history.
Interest rates
It was a mistake to raise interest rates in Australia earlier this year. It curbed the economy when we were being hit with high petrol prices. I do not expect a full % point fall in February, or rather we do not need another drop, but I do not have much confidence in our Reserve Bank board, who act strangely. Additionally according to simple economic theory of supply and demand, with fear encouraging savings, the banks will soon be awash with cash, so rates will stay low or even drop a bit, until the low rates encourage borrowing, and obviously eventually causing rates to rise again, but not for 12 months at least.
Property prices
It is totally illogical for Australian property to drop. Unlike the USA we have a huge unsatisfied demand, due to immigration, lifestyle changes, and past prosperity. The lowest property values were November 2008. I predict a steady rise throughout 2009, except for some high value ex banker or speculator owned properties still overhanging the market. After about 3 – 6 months when these crisis properties are sold, even this market will rise.
Interest rates are low, there are government incentives at the low end, and there is cash available, especially since the banks ripped the cash savings from the non-government guaranteed funds. This growth in low end property development will aloso act to stimulate the economy.
The opinions are of an Australian, who is no expert, just a 68 year old who has seen it all before, again, & again. If you act on these concepts, good luck, but the writer accepts no responsibility. The writer must also declare an interest in that he lives, works and runs a business that is effected by the economy and economic sentiment.
These hopes are based on logic, not the negative ideas being peddled so effectively.
Would he take a punt on these beliefs? No, he has been wrong about timing too many times before. Even if you agree with every aspect of the logic, people and market are not logical. This is not confidential, and the more people who think this way, the less the damage we will suffer.
