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  • Writer's picturePete Jonson

Saturday Sanity Break, 20 January 2018 - economic storm warning

Finally, instead of the usual 'she'll be right, cobbers', someone who should know warns that Australian house and land business might be catastrophic. The Oz reports: 'An Australian property developer who turned his back on the local market because he saw it as too risky says an inevitable softening of residential prices, particularly on the eastern seaboard, will lead to a “spectacular disaster” for those with exposure to development land'.

And if it goes beyond 'development land' many mortgage holders will be in great trouble. There will be bargains for cashed up home buyers, bad loans for banks and a certain loss for the Turnbull government. In Henry's humble opinion, that is the future 80 % certain for the Australian economy.

Two of the old team of (non Russian) KGB have interesting articles in the Oz today. Alan Kohler warns that President Trump's 'tax reform' package will be a disaster'. The Aussie dollar has been rising an broke through the level of $0.80. Was this due to a stumble by the Fed's wordsmiths, Kohler asks, no is the answer.

The smarties in America know that the tax cuts, while good for share prices, will be a disaster for the US budget. When the long boom in bond rates end the US dollar could fall dramatically. There will be two problems for Australia.

Kohler again: 'the problem of competing against lower US company tax rates with a big budget deficit as the starting point, and the problem of a lower US dollar driving our exchange rate higher. 'MacroPrudential policy seems to have ended the boom in house prices and the burning question is whether we shall experience the soft lending hoped for by many Aussies or the hard lending feared by the smarties.

Australia currently has no policy to prevent the rise of the Aussie dollar and this is a major weakness in current economic policy, as regular readers of this column (obviously not Treasury or RBA seniors) will be aware. Henry's proposed solution is a tax on capital inflow. A colleage says this would be too risky for a nation so dependent on capital inflow but it would also be very difficult to impose. This colleagues suggests instead we could place a big tax on inflows of money to buy houses, a version of current feeble policy as Henry understands things.

Kohler concludes: ' The last thing the Australian economy needs with a soft housing market is an exchange rate heading back to parity: the Reserve Bank could come under enormous pressure to cut interest rates again in 2018, against its own wishes and everyone’s forecasts'.

Full article here. Note how much higher the Aussie dollar is than 12 months ago.

Amen, Alan. That's why we need a technique to avoid a modern version (post gold stand era) of a nation being crucified on a cross of gold.

The 'G man' in Australia's KGB is Robert Gottliebsen, 'Gotters' to his special pals. He confirms Kohler's view that the long boom in bond prices is over. And this spells trouble for Australia.

' The US bond chartists are saying that not only is the bond boom over but a long-term bond bear market is about to start, particularly if the US 10-year bond yield reaches 3 per cent.

'That would transform the global interest rate outlook and reduce the value of assets that are valued mainly on yield, including shares, long term bonds and property'.

Sounds sensible to me, and we must all agree we've been warned.

In both USA and Australia jobs growth is the rosiest part of the current situation, at least for people who finally have jobs. Pundits say wages will soon begin to rise. That's on the assumption that the jobs boom is in jobs with reasonable productivity. If this is not the case goods and services inflation will rise and there will be yet another reason to expect cash interest rates to increase.


Last week Henry watched the latest Winston Churchill movie, Darkest Hour. Four stars from Rotten Tomatoes a fair assessment for a histrionic performance. Google and you'll see a trailer.

Fiona Prior continues last week’s fluid theme with the latest Guillermo del Toro movie The Shape of Water. More here.

Henry's editor has posted a new painting in the EconArt genre. Called The Invisible Hand, it attempts to represent Adam Smith's great concept in oil paint and glitter. Access to all examples of EconArt here.

The sporting life.

Nick Kygrios produced the goods in what Henry expects to be the game of the Australian Open. Playing against his long-time hero, Jo-Wilfried Tsonga seemed to help him curb his behaviour, which is not always of the best standard. Or was it that finally he is grown up. Perhaps we shall learn more this week.

There was a good point from Andre Agassi, which is that Kygrios could gain a lot from a good coach. Henry never played at an Australia Open, (being a failed AFL player and much later a champion boomerang thrower), but wondered why when Tsonga got to the net Kygrios never once tried a lob. Someone else pointed out that Kygrios mostly did not use a two-handed backhand, a standard tool for virtually all very good players.

Congratulations to Steve Smith for being awarded the newspaper's 'Australian of the year'. Perhaps this explains Australia's dismal one day efforts, currently 2 zip. The good news is Aaron Finch's superb job opening the innings. Aren't we looking for a reliable, if possible brilliant, opening batsman for the test team? Will Aaron Finch even get looked at, gentle readers. And if not, why not?

Soon the AFLW season will be with us to provide great viewing. Then we'll see the lads in action. Can't wait, really, but the niggle is how little we've heard about Caaaarlton's recruiting.

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