Europe declares ‘a recession of historic proportions’.
US News reports…
‘The economic catastrophe caused by the viral outbreak likely sent the U.S. unemployment rate in April to its highest level since the Great Depression and caused a record-shattering loss of jobs.’
There is plenty of bad news out there on the economic front. Yet, financial markets — so far — are taking it all in their stride.
We’re told the market is standing there with binoculars in hand and looking to the future.
The market’s gaze is firmly fixed on the next peak. The valley below is of little consequence.
A temporary diversion. The next peak is so close you can almost touch it.
Until recently, I was baffled as to why I wasn’t seeing what the market is seeing. I stood there, eyes straining to the horizon, but there was no next peak in sight…not even a molehill.
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The market has its back to the future
Then it dawned on me. I realised what the problem was. The market had its back to the future. It’s been looking at the last peak through those rose-coloured binoculars.
That makes more sense to me. Looking back is a common mistake at the start of a savage bear market.
There’s a (misplaced) optimism that normal trading conditions will once again resume. But markets reaching historical peaks is anything but ‘normal’.
Peaks are abnormal. People get swept up in the euphoria and pay too much. Markets get way ahead of themselves. Then they crash.
Why is that so hard to understand?
Quick snapshot. We had the Dow at record highs. Global debt levels were at record highs. Interest rates are at record lows. Current conditions invite comparisons with the Great Depression and are of ‘historic proportions’.
And we expect things to return to normal? Anyone else noticing some extremes in this list?
Everything is at (the wrong end of) the historical spectrum and it’s just a speed bump on markets?
Am I missing something here?
People are certifiably nuts if they think ‘well, that’s it, just sit tight we’ll work our way up to the next — even higher — peak’.
Here’s a tip…if you want to see the next peak, you’re going to need the Hubble telescope.
It is decades in the future.
What the future will look like…
Let’s take a glimpse at what I expect our future to look like…
In my book The End of Australia there’s a section titled ‘Shattered Dreams, Social Tensions’.
Here’s an extract:
‘What happens when we have another, more serious, debt crisis?
‘The values of the houses (securing the mortgages) fall considerably.
‘Unemployment levels rise. Income (money) lost.
‘Retirement portfolios suffer a sustained run of negative returns. Money lost.
‘This was the scenario the central bankers “successfully” avoided after the 2008/09 crisis.
‘I say “successfully”, because all they’ve really managed to do is delay the inevitable outcome.
‘The problem this time is the central banks have taken the debt high-wire to a much higher height and lowered the interest rate safety net almost to the ground.
‘There will be no soft landing.
‘Dreams won’t just be shattered, they’ll be splattered.’
Although it may not feel like it, that more serious debt crisis has arrived.
For those who can remember the last debt crisis, it began in similar fashion.
Initial ructions in subprime lending saw the Dow Jones Index start to drift away from its late 2007 peak.
Then Bear Stearns went belly up in mid-March 2008. The Dow rallied. The worst was over. Binoculars were on the next peak.
The ‘recovery’ took the Dow back to within 1,000 points of its peak.
In mid-2008 the market was offering investors the opportunity to leave with a dignified loss…the market was only 7% below its peak.
Source: Macro Trends
Then reality set in.
The underlying damage caused by a mere US$300 billion in subprime defaults, began to surface.
All the fancy (and leveraged) products — CDOs, CDSs, MBSs — that hung off this toxic debt began imploding.
Then came the Lehman Brothers moment…that’s the watch out below straight-line plunge in September 2008.
By the time the market had finished purging the excesses, the Dow was down over 50%.
Today, there’s way more debt in the system than there was in 2008. And people think this is over?
If the outcome from this misguided belief wasn’t so tragic, it would be laughable. But there’s nothing funny about retirements lost, house values falling and unemployment levels rising.
This purge is only just getting started.
The recent bounce in the market is an opportunity to leave with a good chunk of capital intake.
Before it gets really ugly, the market is showing you the door.
However, as we’ve seen with previous early stage bear markets, few people will accept the invitation. What people haven’t yet fully realised is the extent of the underlying damage in the economy and how this changes things.
This extract from ‘Shattered Dreams, Social Tensions’ look at the ‘what ifs’ of an economy in contraction…
‘The equation behind Australia’s economic progress is the same for the rest of the developed world.
‘Increased immigration numbers plus higher debt levels equals positive GDP
‘The next crisis will change these factors.
‘Recessions always result in higher levels of unemployment.
‘What if the next crisis coincides with an increased uptake in AI and robotics?
‘What if, no matter how hard anyone tries, not enough jobs can be created to reduce an “un and under-employment” rate that’s closer to 30%?
‘If these “what ifs” become reality, then our immigration intake is going to be cut dramatically.
‘The Australian public (and unions) will not sit idly by and let “foreigners” take the jobs of “Aussies”.
‘Without population growth and absent a desire and/or capacity to borrow (or in the case of retirees, spend) like there’s no tomorrow, our economy will contract.’
When I wrote this back in October 2019, the prospect of a 30% un and underemployment rate put me in the certifiably crazy category.
The latest Roy Morgan Research on ‘Un and Underemployment’ — a far more realistic reading than the ABS numbers — shows the March 2020 (late) rate at…27.4%.
Not so crazy now.
Source: Roy Morgan Research
Imagine what the numbers would look like if the JobKeeper programme had not been rolled out?
What happens when employers no longer receive the government’s JobKeeper payment?
Will we see another wave of newly unemployed queued at Centrelink?
With this level of labour overhang, what pressure will there be on wages to rise anytime soon?
We haven’t seen the worst of it yet…
If you thought the previous period of wage stagnation was bad, you ain’t seen nothing yet.
On 2 May 2020, the Institute of Public Affairs (IPA) published the results of a poll it commissioned:
‘60% of 18-24-year-olds have either lost their job, had their hours cut, or had their pay cut. Among 25-34-year-old Australians, the number is even higher: 63% have been seriously impacted by the economic shutdown.’
These are the consumers and borrowers of tomorrow. This sort of damage is not easily undone.
Stubbornly high un and underemployment and entrenched wage stagnation means private sector credit growth is not coming back to the level needed to move the GDP dial in a meaningful way.
What about calls to cut immigration?
Will Aussies sit idly by and let foreigners take their jobs?
It didn’t take long for the predictable responses…
‘The post-COVID-19 question we must ask now is this: when we restart our migration program, do we want migrants to return to Australia in the same numbers and in the same composition as before the crisis?
‘Our answer should be no.
‘Our economic recovery must help all Australians get back on their feet, and to do that we need a migration program that puts Australian workers first.’
ALP Senator Kristina Keneally
As reported by Nine News (emphasis added):
‘But with unemployment tipped to rise to 10 per cent, Labor wants a rethink on issue more temporary work visas.
‘“It’s quite right that Australians should have the first chance and the best chance at getting the jobs that become available,” Shadow Education Minister Tanya Plibersek said.’
What about the increased uptake of AI and robotics?
According to a recently released report from the Boston Consulting Group’s think tank (emphasis added):
‘COVID-19 is likely to be no different from other crises. It will greatly accelerate several major trends that were already well underway before the outbreak and that will continue as companies shift their focus to recovery.
‘We believe that the application of artificial intelligence will be immensely valuable in helping companies adapt to these trends. Advanced robots that can recognize objects and handle tasks that previously required humans will promote the operation of factories and other facilities 24/7, in more locations and with little added cost. AI-enabled platforms will help companies better simulate live work environments and create on-demand labor forces. Through machine learning and advanced data analytics, AI will help companies detect new consumption patterns and deliver “hyperpersonalized” products to online customers.’
That’s not good news for those desperately wanting to resume well-paid gainful employment…and this is happening globally.
Hopefully this glimpse into the future gives you enough of a peek to see there ain’t no peak coming for a long time.
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