Australian Recession. Our view.

ANALYSIS, Melbourne — 2thinknow have predicted an Australian recession since 2007.

In October 2007, I indicated 2thinknow’s concerns of recession, in December 2007 I made clear predictions of recession and in February foresaw nationalisation of banks & various other consequences.

It’s worth noting that most commentators using economic predictions were wrong in October 2007-February 2008. None raised nationalisation, nor believed the ASX would go as low as 4500. 2thinknow was a lonely voice in specific correct prediction.

2thinknow take a different view, because we have foresight based on proprietary nascent trend analysis.

And, in August 2007 we analyzed that the trend for a cyclical downturn had commenced. The same trend that had been delayed in the ‘tech crash’  of the early 2000s.

Now leading economists at Deutsche Bank & JP Morgan finally agree, predicting the Australian economy will soon be in recession.

Tim Colebatch and Peter Martin outline the leading economists case for a (short) recession, in their view, in today’s The Age here.

Why, oh why?

The Short Version.

It’s a self-reinforcing cycle. This is a simplified version, and there are more factors, but if you get back to basics, more or less, this is it.

Recession is negative growth in total products or services produced. Let’s look at what economic commentators mean when they talk about growth.

The economic pie is bigger for all when the pie grows. (doesn’t measure equitable distribution, or how big a slice who gets). A bigger pie is caused by positive growth.

Positive growth is caused by growth in spending (ie. demand) and production (ie. supply). The driver of economic growth is improved productivity & innovation (this is the root cause, when economists talk about sustainable growth.)

Spending, in turn, is based on available funds & sentiment. Spending has been the source of growth largely in the US, & to some extent, Australia. eg. US buying Chinese goods, leading to forward resource orders buy China from Australia.

Available funds are based on income & debt.

Income subdivides into wages, profits from stock (dividends or growth) & profits from rent.

Debt is based on how much will/can be lent, and sentiment about lending & borrowing.

Sentiment is how business & consumers feel about the economy.

Why Recession?

Well the economy is not growing at the same rate. Why?

The main reason is current growth was built on debt. We owe more than we make.  Our private debt is approaching 150-300% GDP depending on whether you are in USA & Australia.

What we make is now financial services or intangibles, another factor.

Isn’t it all about confidence?

Sentiment is a part of the puzzle, but when people say it’s ‘only confidence’ they don’t get it. In 1929 commentators said this as they were hoping to sell out their own positions, and they need buyers.

The same people say when it’s going up it’s ‘fundamentals’, but when the markets are down it’s ‘confidence’.

People, including cmmentators, tend to either confuse the stock market with economy, or separate prices entirely.
Warren Buffett’s view is that buying stocks, is and should be, buying a share in a business you believe in long-term. That’s Value Investing.

Anything else (short-term) is speculation.

(Warren believed the US was in recession well before the US did.)

But because many of us have a massive amount of debt, and much of that is based on house-prices or interest rates, volatility can impact the ability to service debt.

This is serious, as Steve Keen points out, at the other end of the spectrum, because debt is really too high. (Steve is more pessimistic than 2thinknow).

In other words, asset prices are currently based on available funds from debt mainly. And also, from falling income from shares.

If unemployment increases, then the income from wages will fall.

Finally, as many people are having trouble paying their rent, income from rent may fall long-term. Landlords (especially those with highly-geared investment units bought at the peak) will try to transfer losses in other investments from tenants, and others will flee to investment property (as Australians love property).

It’s complex, but already rents are so high that people are having difficulty paying. Rents & house prices should fall if we are in a ‘free’ market, although the market for rent is highly manipulated.

Fundamental Australian Economics.

Want a good fundamental understanding of Australian economics?

Read Ross Gittins, in Gittinomics. I’ve included a link (and cover from Amazon at right).

Ross would probably say the above differently, as an economist.

2thinknow are not economicsts, we look at the situation in terms of trends & psychology. I micro-economics at AGSM and am an avid reader, but my expertise is in the emerging field of trends.

Where next?

2thinknow predicted the stock market crash, and September 2008 as the ‘turning point’ 12 months ahead.

Next, is a little harder to predict until December, post-election, pre-Christmas.

Worse or better, will be apparent after that date, and we will examine the trends then.

Until then, Australia will move sideways. A bear market phenomenon.

The current prediction we stand by is a fall in property prices of Australain property.

As demand is based mainly on debt & ncome from other investment. Also supply will increase as people try to bail out other investments. More here from April.

That’s the 2thinknow view. What’s yours?