Crying wolf

  • A July surprise?
  • To hike or not to hike
  • A market for sceptics

Australian housing is ‘flashing red’. At least, it is according to the president of the Federal Reserve Bank of San Francisco, John Williams.

Australia avoided the global financial crisis in 2008. In fact, as you are probably well aware, it has not had a recession in 25 years.

The lack of recession combined with cheap and easy money has caused asset prices to soar in certain areas, and Australian household debt to balloon to 189% to GDP.

And, as Williams warned, avoiding the crash may be the reason why Australia ‘perhaps, didn’t learn the lesson of how painful’ a housing downturn can be.

How to fix this mess?

Well, according to Williams, not by hiking interest rates. Nope.

As Williams told The Australian Financial Review, hiking rates has ‘very unfavourable trade-offs when you’re trying to control either a debt build-up or a housing price build-up or a stock market build-up — high costs in terms of unemployment and inflation’.

As the AFR continues, research by Williams a few years ago indicated that ‘if the US Fed under Alan Greenspan and Ben Bernanke had sought to defuse the US housing bubble leading up to 2006 and 2007 “you would have had to create a recession as bad as the recession we actually had” after the 2008 crash, he said.

Why do today what you can put off until tomorrow? Somehow, the image of three famous monkeys comes to mind…

More on this after the markets.


Over the weekend, the Dow Jones Industrial Average gained 62.60 points, or 0.29%.

The S&P 500 is up 3.71 points, for a 0.15% gain.

In Europe, the Euro Stoxx 50 is down 29.45 points, or 0.85%. Meanwhile, the FTSE 100 lost 0.51%, and Germany’s DAX index retreated 0.73%.

In Asian markets, Japan’s Nikkei 225 is up 51.16 points, or 0.26%. China’s CSI 300 is down 0.36%.

In Australia, the S&P/ASX 200 is up 1.71 points, or 0.03%.

On the commodities markets, West Texas Intermediate crude oil is US$45.21 per barrel. Brent crude is US$47.72 per barrel.

Gold is trading for US$1,244.19 (AU$1,617.94) per troy ounce. Silver is US$16.65 (AU$21.64) per troy ounce.

The Aussie dollar is worth 76.90 US cents.

A July surprise?

As Williams sends his warning, the Reserve Bank of Australia is meeting tomorrow.

Will they increase the cash rate from a record low 1.5%?

Deutsche Bank thinks they may. As economist Adam Boyton told The Australian Financial Review, we may have a ‘July surprise’.

With the labour market showing signs of improvement, we think the RBA could join the chorus of hawkish central banks in [this] week’s post-meeting statement’.

He is not the only one that thinks an interest rate hike may be coming. Former Reserve Bank of Australia board member John Edwards is also predicting the days of low rates are numbered. He thinks that there could be as many as eight rate hikes in the next two years.

Will it happen this time?

Probably not. The most likely scenario?

The rates will stay the same. As much as central bankers want to hike rates, if they do, they risk creating a recession too early, a recession like the one in 2008…maybe one even worse.

Instead, let’s cry wolf, in the hopes that the threat will fix the problem. Even if this means higher debt and higher risks in the future…

England, the US and Canada are talking about hiking interest rates…soon.

And if they do, when they do, it will be a whopping quarter percentage point.

But time could be running out, as some are already realising that the expected growth is not coming in anytime soon.

Last Wednesday, the International Monetary Fund cut US economic growth projections to 2.1% for this year and next year. They don’t think Trump will be delivering on the promised tax cuts and infrastructure spending. They think it is ‘an extremely optimistic growth assumption.

Meanwhile, the central banks keep moving things at speed — turtle speed, that is. US Federal Reserve chair Janet Yellen made a bold prediction last week: another financial crisis like the one in 2008 is not likely in our lifetime.

Whose lifetime? Hers, yours, your kids, or your grandkids?

To hike or not to hike…

Could we have a surprise rate hike by the RBA tomorrow?

Most likely not.

Yes, unemployment rate is low. But the underemployment is at record highs, as you can see on the chart below. That is, people that would want to work more hours but can’t. The underutilisation rate is also creeping up. This is the unemployment rate plus the underemployment rate is close to 15%.

chart image

Source: AFR
Click to enlarge

And salaries are not going anywhere. In fact, as of 1 July as many as 700,000 people working in hospitality, fast food, retail and pharmacy have had their salaries cut as Sunday and public holiday penalty rates drop.

Inflation is up, at 2.1% from 1.5% in January. Yet by keeping the rates at a low 1.5%, we are technically on negative interest rates. What I mean is, prices are going up by 2.1% but you are only getting a 1.5% interest on your money.

Keeping your money in cash is now losing you money…the same as in Europe.

And, with interest rates at negative, people will keep searching for investment opportunities elsewhere. Even if it means taking more risks.

So, where to invest?

The traditional method of saving is eating away your money…stocks look overvalued…housing looks overvalued — remember, the higher the purchase price, the less the profit.

So where are investors flocking to?

A market for sceptics

Well, for one Initial Coin Offerings (ICOs) are getting quite a lot of attention, including from sceptics.

And money is flocking in.

Blockchain startup has recently released an ICO for its EOS token. hopes to get large businesses and corporations onto the blockchain to automate processes and create applications. They claim that their platform has eliminated transaction fees and can process millions of transactions per second.

In just five days EOS ICO raised a record US$185 million.

The previous record?

Well, it was only two weeks old.

It was held by Bancor, who raised US$150 million in just three hours. Bancor enables the creation of smart tokens that can hold one or more tokens or digital currencies in reserve.

And then there were the Basic Attention Tokens, targeting marketers. BATs raised a whopping US$35 million in just 30 seconds. We covered BATs in more detail on Saturday in Port Phillip Insider Extra. Subscribers can read more about that here. If you’re not a subscriber, you can learn more about Port Phillip Insider Extra here.

Even sceptics are getting on board.

Take tech billionaire Mark Cuban, who recently tweeted that he believed Bitcoin was in a bubble. He is looking to back digital currency UnikoinGold, which allows anyone to place bets. UnikoinGold has a partnership with Australia’s betting giant Tabcorp [ASX:TAH]. They are expecting to sell the token for the period of one year on the ethereum blockchain.

What has attracted Cuban to invest in this crypto?

As he tweeted, he just wants to learn more about them.

ICOs are booming…but all of most of these have to show are a white paper and a bit of code.

They are startups. There are no revenues…yet. All they have is the excitement of the technology.

That’s why many of these will fail.

Don’t get me wrong, I’m not telling you that EOS, BATs or Bancor will fail. I am just saying that, as with any ICO, these investments are risky. They could fail…or they could soar.

I have a limited knowledge on the subject. That’s why we’re lucky to have someone here at Port Phillip Publishing who has a much better insight, Sam Volkering.

This week we are revealing a brand new cryptocurrency information and investment service. This new advisory focuses on what Sam calls the ‘blue-chip’ cryptos.

Sam is looking forward to telling you about the cryptos, but he’s also keen for you to understand that there’s more to them than just digital currencies. There is a technology and an economic story behind them, as well.

Our new crypto service will be launching this week, and will tell you everything you need to know about how the crypto market works.

Keep an eye out for more details in your inbox on Wednesday.

Selva Freigedo