Is THIS as Bad as It Gets?

Bottoming out is the phrase on the lips of economists.

Put the Federal Reserve pause, trade truce, and China stimulus together and we’re looking for a trough in the first quarter and very moderate pick up ahead,’ Bloomberg’s Tom Orlik said.

Of course, you must remember, dear reader, this is only a best guess.

Forecasts are frequently wrong and often useless.

Yet we have the ‘experts’ pump them out anyway. Some of us just need something. Afraid of fumbling around in the dark or some such notion.

So you can imagine how well received this comment was from IIF’s Robin Brooks:

Global trade fears are overblown, as are concerns that global growth may slow significantly.

Stocks also seem to be singing the same tune. Stocks in the US, Asia, Europe and Oz are all up from their lows in December last year.

Money Morning

Source: Bloomberg
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Yet if the global economy is on the road to recovery, why does Aussie property still have further to fall?

Free report: Aussie stock picker, Sam Volkering (with gains as high as 1,431% in the last 18 months) reveals what he believes are his next four big potential winners.

The rise and fall of property IN CHARTS

Want to know what it took to save the developed world?

Take a look…

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Source: Bloomberg
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Trillions of newly created money. And we’re not even sure if it’s worked yet. All we’ve done is create liquidity to ward off the worst.

Japan’s (top chart) asset purchases (mostly bonds) haven’t reignited growth. You could say the same for the US (second chart) and the Eurozone (third chart).

All three are still weak and require constant attention, or central bankers seem to think so.

We Aussies haven’t bought into the whole ‘quantitative easing’ idea as much. It’s an idea that if you shower money on asset holders, they’ll then shower it over the economy.

But this isn’t what happens, is it?

‘Get out!’ is not a normal reaction to a rising asset price. Most of us think ‘Get in!’ We don’t want to miss out on what could be. We don’t want our neighbours to get rich while we sit it out on the sidelines.

So what you get with QE is not growth. But bubbles. Bubbles in bonds. Bubbles in stocks. And bubbles in property.

Like I said, our central bank hasn’t taken us down the road of no return, yet. But we now find ourselves at a pause. Aussie economists are licking their fingers, putting them in the air and seeing which way the wind blows.

From Bloomberg:

Led by the Fed, many central banks have either held back on tightening monetary policy or introduced fresh stimulus, soothing investor fears of a slowdown. Fed Chairman Jerome Powell says he and colleagues will be patient on raising interest rates again, while European Central Bank President Mario Draghi has ruled out doing so this year and unveiled a new batch of cheap loans for banks.

Elsewhere, authorities in Australia, Canada and the U.K. are among those to have adopted a wait-and-see approach. China, at its National People’s Congress this month, signalled a willingness to ease monetary and fiscal policies to support expansion.

Yet look at a place like Japan, where money is easy and there are asset purchases galore. Is their economy any better off, riddled with debt and extremely low growth?

No. It’s because interest rates (the price of money) are only half the equation. And in certain circumstances it’s not even the important half.

The other side of the coin that gets less attention is the quantity of money being created and where in the economy it goes.

This brings us to Aussie real estate. An asset that in 2017 was thought to be a sure thing.

Why do you think Aussie real estate went on an almost decade-long run? Not only did the cost to borrow come down, banks were also more than happy to create money for mortgages and property related loans.

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Source: Loansense
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Now with mortgage growth contracting, it’s not all that hard to guess where the market will go next. Prices are in search of a new normal.

But if you thought the declines were over, I’m afraid Roger Montgomery of Montgomery Investment Management has some bad news.

Roger points to key data like the decline in first homebuyers….

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Source: Livewire Markets
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The fall-off in interest-only borrowers…

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Source: Livewire Markets
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A similar fall-off in foreign buyers…

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Source: Livewire Markets
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And the decline in home-related retail sales…

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Source: Livewire Markets
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And it’s all pointing to even lower prices.

If Roger’s right, then it could put even more pressure on our fragile economy. Again, from Bloomberg:

Falling house prices may impact Australia’s economy and could spill over into household consumption and small business investment, Treasurer Josh Frydenberg said in an interview with the Sunday Age.

There is “definitely too much heat” in the housing market, though the banking regulator’s intervention on investor loans to buyers had seen a “welcome” increase of owner-occupiers and first-home buyers, Frydenberg said.

With interest rates at a record low and Sydney house prices having dropped 13 percent from their peak, Prime Minister Scott Morrison’s government faces pressure before a federal budget scheduled for April 2 as it trails in the Labor opposition party in opinion polls ahead of an election this year.

What’s next for stocks?

While their job is to focus on price stability and employment, you can bet central bankers have one eye on the property market.

That’s because house prices play an important role in our economy. With rising house prices, people spend more. They draw down equity in their homes to make big ticket purchases. Construction activity increases to take advantage of higher prices and thus, employment improves in the interim.

It’s why in every monetary policy statement, the Reserve Bank of Australia (RBA) routinely speaks about house prices. Here’s a snippet of what they said in February:

The declines in housing prices reflect changes in both demand and supply. Demand has softened in response to the prior years of strong price growth and reduced interest from foreign buyers.

As prices have declined, sentiment towards the housing market has become more cautious, especially among investors in the Sydney and Melbourne markets. The shift in tone has been reflected in a slowing in demand for housing finance at the same time as lenders have tightened credit supply in response to regulatory actions.

A large supply of new dwellings in some cities has also placed downward pressure on housing price growth and rents.

In general, supply has been concentrated in cities where there has been relatively strong population growth, which should continue to support the underlying demand for new dwellings.

If house prices continue to decline, Aussie interest rates might be kept low or pushed even lower. And that will be no fun for stock investors.

This year, you’ve seen the top 500 Aussie stocks rise more than 11%. Earnings likely had something to do with it. But it’s also because the RBA has changed their stances on what could happen to rates next.

Rather than up, which is what most were expecting not too long ago, many now believe the next move could be down. And that might only push stocks up further, although slightly.

Why is this a problem? Because it will reduce the number of potential investments you can buy. It also sets us up for a far larger fall if something drastic does happen.

Hope you brought your crash helmet…

Your friend,

Harje Ronngard,
Editor, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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