In our last newsletter, we touched on the increasingly popular catchphrase “the new normal” and suggested that a more appropriate description might be “the old abnormal”. As the trend towards deleveraging continues, we are coming to realise that two decades of credit-fueled global growth was unsustainable.
Now, let’s flesh out this subtle but important distinction with a few recent examples from all levels of Australia’s economy…
Household mortgage arrears rising
The housing industry is calling for rate cuts and arrears are rising amongst riskier borrowers… But is this “the new normal” or simply a product of previous arrears levels being artificially low?
When property prices were rising, overstretched households could simply sell and pay off their debt. Now liquidity has dried up and prices are sliding, stressed homeowners have no choice but to slip behind on repayments. Yet despite all that, banks are doing whatever they can to shovel debt to another generation of first homeowners, encouraging them to buy houses that, to put it bluntly, are too expensive… Is anyone else worried?
Company earnings downgrades
It comes as no surprise that retail mogul Solomon Lew wants a 0.50% -0.75% rate cut when the RBA meets next week, but what came as more of a shock was David Jones’ dramatic profit downgrade earlier this month.
The impact of internet shopping remains a topic of conversation, but the reality is that online sales still only make up a tiny portion of overall sales. Whilst everyone’s favourite retailer points to “disastrous consumer confidence levels”, the reality is more a case of previous confidence levels being artificially high.
Unsustainable growth in household debt saw companies like DJs profit from a credit-fueled consumption boom. How are they going to cope now that we have left “the old abnormal” behind?
Government tax receipts falling
Surprise, surprise… Treasurer Wayne Swan has revised tax revenue expectation lower (again!), meaning that more spending cuts are required if the Government is going to hit its (political) deadline of getting the Budget back into the black in 2013.
What the boffins at Treasury don’t seem to realise is that this is not so much a problem with current tax receipts being too low, but more a problem of taking the previously-elevated level of tax receipts for granted. Inflated capital gains (thanks to debt-fueled speculation) and company tax (driven by debt-fueled consumption) made the Treasurer’s job too easy for too long (we’re looking at you Peter Costello!).
Apparently you can have too much of a good thing, after all! How are future Governments going to lavish middle class welfare on taxpayers when they have already squandered the proceeds of unsustainable boom years?
What it all means
The Barefoot Investor explained this situation perfectly in a recent post:
The old rules don’t apply (but the really old ones do)
The biggest danger facing investors today is falling into the same trap as our free-spending federal politicians: extrapolating the last 20 years (where debt made everyone look smart, and rich) as the playbook for the next 20 years.
When you take a broader view, you see that the last 20 years were actually an outlier: from the early 1990s to the mid-2000s, household debt as a proportion of annual household disposable income shot up from 60 to 150 per cent.
Today we’re reverting to the long-term average, which isn’t to say that there aren’t great fortunes to be made – just that the free kicks have come and gone. That’s why I shudder when I hear financial advisors trotting out ‘gearing strategies’ for clients. That’s so 2005. (Keep in mind, most ? cough ? ‘advisors’ who recommend borrowing to invest get paid on the total amount you invest, so the more you borrow the more they make.)
Put simply, the rules of the last 20 years don’t apply – but the thrifty, conservative rules that served my Nana 50 years ago do.
That’s the bottom line… Don’t waste your time with the constant stream of financial “news” (*ahem* noise *ahem*) - get out there and learn from people who have actually been through the ups and downs, so that you can begin to understand the cyclical and structural trends that truly impact the economy, your job prospects and your personal well-being.
