Why the long faces, everyone?
For years, Australian consumers have been twitchy. With good reason. A lethal combination of soaring household debt, overpriced real estate and painfully weak wages have seen households slam the brakes on spending.
Now, the pessimism is spreading to the business world and to financial markets.
A survey of corporate leaders last week — almost 1,500 company directors — found that almost 60 per cent were concerned the economy would deteriorate next year, citing a laundry list of problems that primarily focused on things outside our control. China, trade wars and weak global conditions.
Few, it appears, are convinced by the Reserve Bank’s recent soothing remarks that we’ve entered a gentle upswing. In fact, just 8 per cent reckon things will be better next year.
After decades of growth driven by a resources boom, a housing boom, an immigration boom and a construction boom, it would appear we are running out of options to maintain economic momentum.
US bosses get the blues
It’s not just here, either.
The mood of American business executives suddenly has turned sour. After two years of celebrating the rise of Donald Trump — whose corporate tax cuts added a burst of nitro to an already overrevved Wall Street — they too are anxious about the future.
A study late last week showed confidence among American chief executives has dropped to its lowest level in a decade. That’s despite a constant succession of Wall Street highs.
For two years, corporate America has pumped up company valuations — and hence executive bonuses — through buying back shares, essentially showering investors in cash. It’s been financed with the tax cuts and cheap debt.
And that’s the problem. Very little of the cash was invested for the future.
The sugar hit from the tax cuts now has evaporated and with overstretched balance sheets, there’s rising apprehension about borrowing more to simply hand back to investors, even with falling interest rates.
Not surprisingly, the share buybacks suddenly have started to fall, raising concerns that one of Wall Street’s key pillars has begun to crumble.
In the second quarter, American companies spent $US166 billion ($243 billion) soaking up their own shares. That’s well below the previous quarter’s $US205 billion and the $US190 billion they spent in the same period last year. If it continues to drop, a large slab of demand for shares will be removed.
No wonder the horses are jittery.
Money markets ignore the Lowe down
Despite all the reassurances that the economy is in recovery, and RBA governor Philip Lowe’s incantations that we’re about to return to normal conditions next year, bond markets — the financial markets that really matter — simply don’t believe it.
Given his recent bullish comments to an IMF meeting in Washington, most pundits have scaled back the odds of a November rate cut. But there is a substantial bet on a pre-Christmas cut and almost certainty of one early in the New Year.
In a weird contradiction, even senior RBA officials have hinted at just how they might continue propping things up once they exhaust their options on interest rates.
If things really get desperate, with say a banking crisis, and the RBA cuts to 0.25 per cent, it seems likely the RBA’s first step will be to inject money directly into the economy through what’s known as Open Market Operations.
This would help narrow the gap between the cash rate and the rate banks charge mortgage holders.
It did this during the financial crisis in 2008 but interest rates were much higher back then. This time around, mortgage repayments could drop to around 1 per cent or even lower.
US bond markets are behaving in a similar fashion. Late last year, American bond yields were rising in anticipation of a return to more normal economic conditions.
The Trump administration’s trade war put paid to all that. While US employment is still strong — as is the case here — the ongoing trade hostilities with China are starting to exact a toll in terms of manufacturing output and earnings.
Stock floats sinking
There’s an unmistakable air of nervousness on stock markets. While the market sits just below record levels, three major local companies have been forced to back out of a stock market debut at the 11th hour in the past few weeks.
First it was Latitude Finance, the former GE Money that enlisted the services of Ahmed Fahour in a bid to convince investors to tip in their hard-earned. Then came Retail Zoo, the owner of Boost Juice. And last Thursday, Singapore based Property Guru pulled its $362 million float.
In each case investors baulked at the valuations. Latitude, which at $1 billion was to have been the richest float of the year, simply wasn’t worth the price tag. Neither were the others.
That followed a string of failures on Wall Street, the most spectacular being WeWork. From one of the most anticipated floats just a few months ago and worth a supposed $US100 billion, it now is in crisis, with founder Adam Neumann sacked and its high-profile Japanese backer SoftBank desperately attempting to keep it afloat.
Uber and Lyft are trading at huge discounts to their listing price and investors, it would appear, have had enough.
These developments have sent shockwaves through the venture capital and private equity industries and could be making some superannuation fund managers squirm.
With interest rates so low, super funds desperately have been seeking higher returns with many opting for “alternative investments”. It’s been a strategy that has delivered handsome returns. Until now.
Venture capitalists, firms that inject cash into start ups, have been hyping the value of their investments, repeatedly marking them up each time they invest more cash despite many of them still burning cash.
Private equity firms, meanwhile, have paid over the odds for old fixer-uppers, hoping a lick of paint and some new carpet may be enough to paper over the enormous debts and poor prospects when the flick them off to stock market investors.
When all else fails fire up a property boom
So, what do you do with your cash in a low-interest world if everything is overpriced?
If there’s one area where Australians are showing no signs of restraint, it is in real estate.
The three rate cuts since June have done little to ignite the real economy. Instead, after almost two years of declines, property prices are bouncing back with a vengeance, at least on the east coast.
According to CoreLogic, the past weekend saw the busiest week for auctions this year, with clearance rates climbing to a national average of more than 75 per cent. This time last year, just 48 per cent of dwellings cleared at auction.
With pressure on regulators to ease the credit restrictions imposed in the wake of the banking royal commission, it would appear the Federal Government and the Reserve Bank are keen for anything to boost sentiment and lift spirits, even if it is a return to the boom that caused the household debt problem in the first place.
What could possibly go wrong?