Professor Steve Keen’s latest prediction…

  • Learn from the Dutch
  • Big Australian Short
  • In the mailbag

Look out! Professor Steve Keen is about.

According to Property Observer:

Australia faces the prospect of a recession in 2017, going by a forecast by economist and author, Steve Keen, the lone voice against the average consensus for growth in the 2017 Business Day survey of economists.

Professor Keen predicted GDP for the year to December at minus one percent, implying recession, while also predicting a fall in wages of 0.5 percent. It repeated his earlier forecasts.

Your editor isn’t an economist.

Therefore, Business Day didn’t survey your editor.

But if we were an economist…and if they had surveyed us, we would have joined Professor Keen in predicting a recession.

Why?

We explain it all here.

Markets

Over the weekend, the Dow Jones Industrial Average closed up by 186.55 points, or 0.94%.

The S&P 500 gained 16.57 points, or 0.73%.

In Europe, the Euro Stoxx 50 index ended Friday up 19.5 points, for a 0.6% gain. Meanwhile, the FTSE 100 gained 0.67%, and Germany’s DAX index added 0.2%.

In Asian markets, Japan’s Nikkei 225 is up 11.65 points, or 0.06%. China’s CSI 300 is up 0.38%.

In Australia, the S&P/ASX 200 is down 5.78 points, or 0.1%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$53.86 per barrel. Brent crude is US$56.85 per barrel.

Gold is trading for US$1,221.07 (AU$1,590.98) per troy ounce. Silver is US$17.48 (AU$22.78) per troy ounce.

The Aussie dollar is worth 76.74 US cents.

Learn from the Dutch

Oh, while we’re on the subject of an Aussie recession, did we mention the latest retail sales data? Business Insider Australia reports:

Australian retail sales recorded a shock decline in December, according to the data released by the ABS this morning.

However, despite the worrying decline, retail sales volumes rebounded strongly over the quarter, something that bodes well for Australia’s Q4 GDP report that will be released in early March.

In nominal terms, the ABS said sales fell by 0.1% to $A25.61 billion in seasonally adjusted terms, missing expectations for an increase of 0.3%.

It was the first monthly contraction in retail sales since July 2016.

November’s figure, previously reported as an increase of 0.2%, was also revised lower to just 0.1%.

As a result of both those outcomes, annual retail sales growth slowed to just 3%, down from 3.2% in November and the slowest pace seen in six months.

The Australian Bureau of Statistics (ABS) releases the 2016 fourth quarter GDP (gross domestic product) data on 28 February.

The last release by the ABS showed the Aussie economy had contracted in the third quarter of 2016. That was when most economists had forecast a big increase in GDP.

Right now, most economists are predicting the same thing — a big rebound for the Aussie economy. In fact, most mainstream economists aren’t debating whether the economy will expand or contract…they’re just debating how big the expansion will be.

After all, this is the Aussie economy we’re talking about…the miracle Aussie economy where nothing goes wrong, and where it expands for 26 straight years.

Plus, think of it this way — most of the economists who take part in these surveys were probably still at school or university the last time Australia went into recession.

They have no idea what a recession looks like. They are clueless about what to look out for when a recession is imminent. They don’t know the clues. They just know that Australia doesn’t ‘do’ recessions.

Well, we’ll just say that no boom lasts forever. It’s shocking that we even have to say that. But we do. Because there are a significant number of people in Australia with no concept of what a recession looks like, let alone having experienced one.

That’s why, in our view, when the Aussie economy goes into recession, it won’t be a short-term blip. It will hit the economy, businesses and individuals hard.

Take the Netherlands as an example. It currently holds the record for the longest stretch of economic growth without a recession. It lasted from the fourth quarter of 1982 to the third quarter of 2008.

It was a whopping 103 quarters of economic growth — one quarter shy of 26 years.

That’s impressive. But Australia is closing in on that number. At the latest count, the Aussie economy has experienced 100 quarters without a recession.

But our bet is that streak will fall on 28 February, when the ABS announces a second consecutive quarter of contraction. That’s when it will get interesting for the Aussie economy.

Check out this chart. It shows the Netherlands’ GDP, in current prices, going back to 1980. The green arrow shows the record period of growth:



chart image

Source: Bloomberg
Click to enlarge


[Note: The chart only shows year-over-year numbers, not quarter-over-quarter numbers. So providing a decline in GDP didn’t happen for two consecutive quarters, it doesn’t count as a recession.]

But the more interesting aspect is the red arrow. You can see that, from the end of the growth period in 2008, the Dutch economy went backwards for much of the next eight years.

Even today, the Dutch economy is a fair way below where it was in 2008.

That’s partially reflected in the performance of the Dutch AEX index, which is traded on the Amsterdam Exchange. Check out the chart below.



chart image

Source: Bloomberg
Click to enlarge


Dutch stocks peaked in 2000. Even after rallying from 2009, the AEX index is still 27% below its peak. That’s not too dissimilar to the performance of the Aussie market, which is still down 14% from the 2007 peak.

It’s worth paying attention to the similarities. While it may not be obvious, there is a big connection between the Netherlands and Australia.

No doubt you’ve heard the term ‘Dutch disease’. It was first coined by The Economist in 1977 to describe the problems faced by the Dutch economy.

The problem was that the Dutch economy had experienced a big decline in its manufacturing base from the 1960s onwards, following the discovery of a huge natural gas field.

Instead of investing in manufacturing and other productive industries, the discovery of natural gas caused a flood of money into the Dutch resources sector at the expense of investing elsewhere in the economy.

Pre-dating the Netherlands’ woes, a version of Dutch disease played out in Spain during the 16th and 17th centuries. The discovery of gold and silver by conquistadors in South America resulted in huge efforts to look for even more gold and silver.

The result was the neglect of the rest of the economy, and a downhill trend beginning with the Spanish Armada’s defeat at the hands of Sir Francis Drake.

The Spanish economy and empire was never as powerful thereafter.

For Australia, the outlook (at least in our view) appears to be clear. The country has spent the past 60 years exporting raw materials, and not much else.

As we noted last week, the fact that an economy exports raw materials isn’t necessarily a bad thing — as long as the export boom can last. But what if it can’t last?

What will replace it?

What other sectors has the Australian economy developed over the past 25 years?

What can replace or supplement the export of resources when demand and prices fall?

Perhaps you have the answer to that…because we don’t. We’re struggling to see exactly what the Aussie economy can produce (whether it’s goods or services) and export to the rest of the world that the rest of the world, individually, can’t source on its own.

Just what is Australia’s edge?

It does have an edge, right?

You’d hope so…but not one that we can see. D-Day for the Aussie economy is fast approaching. It’s 28 February. That’s when we’ll learn if the ‘winning streak’ of economic growth continues, or whether a multi-year slump into a painful recession has begun.

Big Australian Short

But wait. Don’t just sit there and be all maudlin about it. Do something about it. We’ve created a way of helping Aussie investors potentially profit from a coming recession.

Check it out. Details here.

In the mailbag

From subscriber Dave M:

I remember in one of the newsletters an editor warned against buying shares in GoPro because of the likelihood of competition delivering a competing product. With the plethora of similar cameras out there now this is probably part of the reason for their drop off in results. It was probably Sam.

It wouldn’t surprise me if Sam had spoken out against GoPro Inc. [NASDAQ:GPRO]. Sam is a tech-head, but he doesn’t view all technology through rose-tinted glasses.

However, we do recall Vern Gowdie telling folks not to touch the shares with a 30-foot barge pole.

It was a good call. It appears to be a terrible business. Especially when you consider that GoPro cameras do little else but record video. Compare that to a smartphone.

GoPro may have clocked up over US$1.1 billion in revenues last year, but that means nothing. Eastman Kodak Company [NYSE:KODK] had revenues of US$1.8 billion last year, and lost US$80 million — that’s a terrible business too.

That means they’ve got two things in common: a bad business, and big losses.

Cheers,
Kris