I can’t resist. The once greatest Australian property bull is now its most vicious bear. Chris Joye:
Remember the “new normal”? The “low rates for long” paradigm? It’s dead. Recall how we needed a “search for yield” because “there is no alternative” (TINA)? This spawned many new asset categories, and fuelled crazy demand for start-ups and tech stocks, crypto, commercial property, high-yield debt, private loans and income-rich equities. Those trades are all cactus.
…The new normal is much higher risk-free interest rates that will force up the yields on all riskier asset classes, which in turn means their valuations must adjust down permanently lower. Thereafter, asset prices should track changes in purchasing power driven by modest income growth.
The predictable inflation crisis has become a cost-of-living crisis, which in a world obsessed with inequality has become a political crisis. And those myopic politicians have opened the door to allowing the central bankers to engage in an existential battle against the single biggest threat to their credibility in more than 40 years. And the one thing central bankers obsess about is credibility. It is why they are preternaturally wired to never admitting they are wrong and pretending they are seers. The central bankers believe that if they do not crush inflation here and now, back down to their parsimonious circa 2 per cent targets, they will lose their ability to convince the community that inflation will remain within their targets over the long run.
…According to some excellent research from Barrenjoey’s analysts, the average Aussie borrower’s mortgage repayments are still about 180 basis points behind the RBA’s current rate-raising profile. That means these rate changes have yet to hit their cash flows and the wider economy.
…Barrenjoey’s analysts point out that about 90 per cent of the excess household deposits are held by individuals over 55, who are least likely to have much, if any, mortgage debt.
…Needless to say, this is all horrible news for the commercial and residential property markets, which are going to undergo truly massive price declines to compete with the much higher yields available on cash, government bonds and bank bonds.
There is a contradiction in this analysis. If central bankers are going to crush inflation via “truly massive” falls in asset prices then they, sooner or later, will be forced to slash interest rates and said asset prices will rebound.
The key to this is Chris’s line that “myopic politicians have opened the door” in “a world obsessed with “inequality”. That is, fiscal policy will determine where the risk-free rate settles, not central banks.
This is true. But what is the likelihood of ongoing fiscal spending?
- The US congress is headed for a debt ceiling crisis.
- Europe has won its energy war and its related fiscal transfers to households and businesses will fall away just as fast.
- Australia has a negative federal fiscal pulse and is pouring cold immigration water all over smoldering wages.
China is where fiscal policy is working hardest and that will persist, but only to offset the structural deflation of its property bubble, and it will be forced to cut its interest rates again anyway.
That is, it is far from certain that COVID-inspired MMT will come back for another round, especially since the resulting inflation will have spooked many pollies.
If not, then we are left with a global economy that still has a demand deficit, and excess savings, as well as all of Europe and Asia running supply-side economic models that are creating too much supply. Not to mention unaddressed inequality, declining demographics, automation and regionalisation, all of which are also deflationary.
There are other inflationary drivers. Decarbonisation is one but only for now. Free energy ain’t inflationary in the long run.
There’s war and geopolitics to drive inflation but they do not seem likely to get worse in the next few years, either. At least until the Chinese economy stalls, and then look out Taiwan.
If this is the case, then the lowflation period we have passed through is not over. It will become more volatile but, like snow in the sunshine, it will always melt away.
If this is the case then the coming recession, about which I completely agree with Mr Joye, is a great time to buy risk assets.
What will define them in forthcoming cycles is not stagnation but higher volatility.
Chris Joye: doomsayer!
