Bad Things Are About to Happen Thanks to the Budget

[Editor’s Note: Fund manager David Tice just joined the Chorus of the Bears. He predicted that the American economy is months away from a deep correction that will send stocks down by as much as 50%.

Tice is known as the wildly successful manager of the Prudent Bear Fund. He sold the fund to Federated Investors just as the 2008 financial crisis was unfolding.

Now, as CNBC reports, he’s ‘emerged from hibernation to capitalize on the potential downturn.

“The market has tended to go down about every seven years. It went down in 1987, 1994, 2001 and 2008,” Tice told CNBC. “During these periods after the declines, it rallies like crazy. But now bad things are about to happen again.”

Vern Gowdie agrees. He shows you how to bunker down and prepare for those ‘bad things’ today. And how you too can capitalise on the coming downturn once the dust settles. Find out how here.


Well played, ScoMo. Well played.

I’ll freely admit I didn’t watch a second of the budget circus last night. I was having a much better time at the Doomers’ Ball we held at the Windsor Hotel in the city, chatting to readers and listening to my colleagues speak.

Even if I were at home, I would’ve avoided watching budget night. The lies, the spin, the selfish focus on what do I get out of it…it makes me nauseous.

But, with some of the hot air having evaporated this morning, I took a peek at the headlines. And it seems like ScoMo delivered a budget designed to keep everyone happy…or nearly everyone.

As far as the politics of it go, this budget looks pretty solid. It’s got plenty of holes in it, and I’ll get to those in a minute.

But we all know budgets are only partly about the sensible management of national finances. More importantly, they are about keeping people happy so you can retain power.

ScoMo is a politician first and a treasurer second. He no doubt had Joe Hockey’s fate in mind when putting this budget together. You could argue that Joe wore his treasurer’s hat first and politician’s hat second in 2014. Bad move.

Democracy doesn’t reward that behaviour…

Anyway, before I get to the budget holes, did you notice how bank share prices tanked yesterday? The selloff wiped $14 billion off the sector.

The cause of the selloff was a ‘rumour’ that the budget would contain a bank ‘levy’ (read: tax). As it turns out, the rumour was well-founded. The budget did contain a bank tax. Too bad if you weren’t privy to it…

Who wants to bet that this insider trading gets completely overlooked? In fact, when a leak comes from Parliament, and goes straight to well-connected fund managers, it’s not insider trading at all. It’s just good information-gathering. Nothing to see here, folks…

As I said, Morrison slapped a 0.06% tax on the liabilities held by the big four banks and Macquarie. Politically, this was a pretty safe move. Who doesn’t want to see the banks cough up more? They make plenty.

But my guess is that the banks will — in some way — pass this on to customers, most likely through a slight change to their interest rate structure. So really, this is an extra tax on consumers.

As is the increase in the Medicare tax to 2.5%. Although not kicking in for two years, it acts as another drain on consumers.

This will bring the top marginal tax rate in Australia to 47.5%. Given the increasing mobility of capital and labour, this is a hugely uncompetitive tax rate.

Where is the incentive to push yourself and earn more when you have to give half of it to the government? Especially when you know it will simply distribute the fruits of your labour to gain votes, and not to benefit the long-term welfare of the country.

And for all the bleating about housing affordability, there wasn’t any hint of the required structural reform needed to bring this about. Just more demand-side measures that will only push prices higher. Again, good politics.

After all the taking and giving is done, the government will still need to borrow $29.4 billion this year. As always, it gives more than it takes. Put another way, it spends more than it earns.

And to keep with recent tradition, the government expects to get back to surplus by 2020-21. Which sounds good, if you can believe the forecasts.

But this is where there are issues.

For example, the government sees real GDP growth of 3% out to 2020-21. It forecasts inflation to remain stable, unemployment to fall, and wages growth to pick up.

It’s like someone said, ‘ScoMo, what’s your dream scenario for the Aussie economy over the next few years? Consider it done…’

Interestingly, the government expects household spending to pick up. From the budget papers:

Household consumption growth has been relatively moderate in recent years compared with long-run historical growth rates. It is expected to pick up over the forecast horizon to 2 3⁄4 per cent in 2017-18 and 3 per cent in 2018-19. It is expected that consumption will continue to grow by more than household income, resulting in a further decline in the household saving rate.’

Household consumption is unlikely to return to historical growth rates because the sector now carries world record debt levels. Yet the government expects consumption to continue growing faster than income, meaning it expects debt levels to continue to rise.

So more debt will fuel an increase in economic growth, which presumably won’t lead to an interest rate rise, because if it did it would impact spending on the heavily leveraged household sector.

In other words, the rosy forecasts don’t look likely to eventuate at all.

I would expect my eight-year-old daughter to think things through better than this.

But it’s no big deal. It’s not really meant to make sense. In 48 hours, no one will care. The footy will be on and we’ll all go on living our lives.

Which just goes to show that the whole budget forward estimates are a farce. Who knows what the world will look like in four years’ time? Not you, not me, and certainly not the government.

This budget is just a continuation of the political mediocrity we have all become used to.


Greg Canavan,
Editor, Money Morning

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

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