An Insufferable Bore of an Economy

  • ‘Gods’ to decree lower rates
  • The pain of Michael Corleone
  • This will be big

If the Australian economy were an individual person, it would be an insufferable bore.

It would, we think, be Donald Trump. Everything would be the ‘best’ and ‘huge’, and no one would be able to match his greatness.

If the Aussie economy were a sports team, it would be Steve Waugh’s Australian cricket team of the 1990s and 2000s. It would win everything, and do so with such arrogance that even Aussies began to wish the team ill.

We bring this up after bumbling into an article by Ross Gittins in today’s Age. Warning. If you’re of the realist disposition when it comes to economics, you may wish to put down any sharp objects or hot liquids, for fear of injuring yourself or others.

To quote Mr Gittins:

One way to be a loser is not to have the wit to realise when you are winning. Being a winner but not knowing it isn’t all that gratifying.

That’s why it’s worth making a fuss about the news that, with the economy’s growth of 0.5 per cent during the three months to June, we have now completed 25 years of continuous economic growth.

Flags. Fanfare. Standing ovation…please. Mr Gittins continues:

So, if economic management was an Olympic event, we would have won gold at Rio and at several games before that.

And while we’re patting ourselves on the back, we should note that, with our economy growing by 3.3 per cent over the year to June, we have one of the highest rates of growth in the developed world.

Longer. Higher. Another medal thanks.

Oh joy. Trumpets. Hallelujah. I see angels. More from Gittins:

Did you know that when the finance ministers are sitting around at meetings of the G20 and our treasurer starts sharing his troubles, the others just laugh.

They’d love to have our troubles.

And did you know that when our retiring Reserve Bank governor Glenn Stevens decides to say something at international meetings of central bank governors, the others stop fiddling with their phones and listen.

That’s partly because our record is so much better, but mainly because of the respect in which our man is held.

That’s it. The ‘second coming’ has happened. Jesus is here. And he is ensconced in a dreary building in Martin Place, Sydney, running the Reserve Bank of Australia.

For only the son of God could be spoken about in such luminary terms.

With that, we shall conclude our thoughts on the subject. We shall thank the Lord Almighty for the greatness he has delivered unto the Australian economy, and of course, for the expert way in which His apparent son meddles with interest rates.

Praise be…

Markets

Overnight, the Dow Jones Industrial Average fell 11.98 points, or 0.06%.

The S&P 500 index fell 0.32 points, or 0.01%.

In Europe, the Euro Stoxx 50 index gained 21.5 points, or 0.7%. Meanwhile, the FTSE 100 closed up by 0.3%, and Germany’s DAX index rose 0.62%.

In Asian markets, Japan’s Nikkei 225 index is down 18.25 points, or 0.11%. China’s CSI 300 index is up 0.01%.

In Australia, the S&P/ASX 200 is down 54.95 points, or 1.01%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$46.34 per barrel. Brent crude is US$48.69 per barrel.

Gold is US$1,345 (AU$1,752) per troy ounce. Silver is US$19.81 (AU$25.81) per troy ounce.

The Aussie dollar is worth 76.75 US cents.

‘Gods’ to decree lower rates

Returning briefly to the subject of central bankers — and we do mean briefly — it’s hard to come away with any other opinion of them other than they do believe they have God-like powers.

From today’s Financial Times:

Bank of England governor Mark Carney has left open the possibility of further cuts in UK interest rates this autumn despite acknowledging the risk of recession had receded in the past month.

Mr Carney took credit for the bounce in August’s business and consumer surveys, telling MPs during a parliamentary hearing that part of the recovery in sentiment was “because the bank took timely, comprehensive and concrete action and that action has had an impact”.

It’s a new fact. A central banker can never be wrong. And how could they be wrong? It’s not possible.

Legendary commentator and newsletter writer, Jim Grant, refers to central banking and the current monetary system as the ‘PhD Standard’.

The central bank economists plug their numbers into a spreadsheet, and hey presto, there’s the answer to steer the economy in the right direction.

And if it doesn’t go in the right direction, well, that’s not their fault, it’s the economy’s fault…or your fault as an individual. Clearly you don’t understand economics.

But on another note, we wonder just how low the Bank of England can take interest rates. The Bank’s current rate is 0.25%. Has the Bank of England just told the market that 0% interest rates are on the way?

And if that doesn’t work, what are the chances of negative interest rates?

Based on all the evidence, we’d say the chances are pretty darn good.

After all, despite the talk from the US Federal Reserve, each time it seems to get closer to raising rates, the economic data stops them cold in their tracks. The Fed’s Fed Funds Rate now has an upper band of 0.5% (although in reality, it’s actually around 0.4%).

As for Australia, according to Mr Gittins, the local economy is a gold medal winner. However, even that isn’t enough to raise Aussie interest rates off their record low of 1.5%.

Are zero or negative interest rates on the cards here? Both seem a stretch right now, seeing as Aussie rates are typically at a premium to US interest rates.

But an interest rate of 1% or lower isn’t out of the question. And that could be so even if Australia makes it to 26 years of so-called economic growth.

The pain of Michael Corleone

It’s impossible, just impossible.

As much as we try to veer away from the topic, we can’t escape.

We have visions of Al Pacio’s, Michael Corleone in The Godfather Part III:

Just when I thought I was out, they dragged me back in.

More from the Financial Times:

This week two public companies took free euros offered to them by investors, when they became the first to sell bonds with a negative yield-to-maturity.

Henkel, a German maker of Persil laundry detergent, sold 500m of two-year bonds with a yield of minus 0.05 per cent while Sanofi, a French pharmaceuticals manufacturer, sold 1bn of three-and-a-half year debt with a yield of minus 0.05 per cent.

It’s true. There is such a thing as free money.

In short, investors are prepared to pay more than the face value of the debt, in return for the supposed certainty of getting their money back two years from now.

At last check, the Henkel two-year bonds traded with a yield-to-maturity of minus 0.08%.

Of course, there’s another element to this. Yields aren’t negative just because sensible insurance companies are buying them to hold on until maturity. The ‘greater fool’ theory is at play here too.

You may be familiar with the term. It’s the idea that someone will buy at a high price in a bull market because they believe there is a ‘greater fool’ than them who will buy from them at an even higher price.

Bond prices move inversely to bond yields. As interest rates fall, bond prices will rise.

So, a speculator who believes that already low interest rates will fall farther, would think nothing of buying the bond today. Not because they’re interested in losing money, but because they believe the bond price will rise as interest rates fall.

Based on the comment from Bank of England chief, Mark Carney, betting on falling interest rates seems to us to be a fair idea…even if it relies on the participation of ‘greater fools’.

The Henkel two year bond currently trades at a price of €100.161. We shall keenly watch how the price performs.

This will be big

I’ll have more for you on this next week. But something big is about to happen within Port Phillip Publishing. And it’s all to do with gold.

Or rather, a certain type of gold.

Bloomberg reports:

Gold held near its three-week high as weaker U.S. economic data damp prospects for an interest-rate increase this month by the Federal Reserve.

Gold is heading for the first annual gain in four years as demand has surged for haven assets following the Fed’s hesitation in raising borrowing costs and the U.K.’s vote to exit the European Union. Weaker U.S. data, including a drop in a services gauge on Tuesday to a six-year low, is dimming the outlook for a rate increase.

What will gold do next? In a way, I don’t care. I believe it could go higher…much higher. Will I be right? Who knows? We’ll see.

But whatever happens to the gold price, I believe a certain type of gold could soar higher regardless.

What is this type of gold? And why is it so special? We’ll have more for you next week. Including, an important announcement.

Cheers,
Kris