First quarter inflation - 0% - Rate cut on the way

This is how I see it.
We have an upcoming election with significant tax changes on the table, we have a manufactured decline in house prices that most people simply don’t understand, we have a media calling doom and gloom on both.

I mean what was the expected outcome? Of course people are going to lockdown on spending in the interim.

I take 0% inflation this quarter with an absolute grain of salt. RBA would be mad to cut rates until dust settles post election.

The declining house prices in many of these articles is frustrating to read when you know the exact reason why it happened. It couldn’t be simpler yet the masses are unaware that borrowing got cutoff. It’s that simple.
I still maintain the drop will stop when we again align to the new ceiling.

But when this occurs, when the election is over and when some confidence returns then inflation will increase. We need to remember that even with house prices at peak we still had inflated assessment rates which meant people still should have surplus cash.
Yes people which purchased at and around peak now have and will continue to have negative equity for some time....that sucks.

But we now have a whole raft of people waiting to enter the market at declined house prices that will have significantly improved cash surplus.

Point being is we just need to show some bloody patience!!! Let the election finish, let house prices met borrowing capacity and let some confidence restore to the media and masses and THEN see where we are at.
It’s not like it’s a long wait either. It should al play out in the next 6-9 months.

 

Watch what happens next, interest rate drop will cause further falls, predictng AUD to hit 65, lets see

 

Now as for wage growth I have to say I sit on the bad side of the ledger on this one. I work as a business analyst and my major focus is automation. The reality is vast improvements in technology is making it that much easier to replace skills and we are only now starting to scratch the surface of AI.

It’s going to only get that much harder to justify any kind of significant increase when your job is getting easier.

 

But investors cant buy if credit criteria does not ease, therefore I see further falls.

Also market sentiment atm is negative and this impacts on the psyche. In times like this people sit on their hands, more supply comes to market

Its not all doom and gloom, but dont expect changes overnight. Happy days after an election?? I see further uncertainty if/when Labor gets in

Oz has had a bloody good run, now we have to suck it up or play in high risk environment

 

This is what I mean by the new ceiling though. Credit doesn’t need to change. House prices just need to align to the new credit ceiling.

Remember most of the market is made up from people who only own 1 property with almost the rest of them owning 2. So how much does say Melbourne need to decline by for the new ceiling to occur on these buyers/owners?
I have read different things but as I understood it was around 15-20% which we are now close to.

As for Labor I don’t argue at all the uncertainty this will cause with the property market,
But I think the uncertainty with the general government is the bigger player from an inflation perspective. My comments were regarding the topic of inflation and I believe uncertainty with government is a major factor in this.

 

From ABC News:

"About 36 per cent of Australian jobs face a significant or high risk of automation, according to a new Organisation for Economic Co-operation and Development (OECD) report.

"The OECD estimates 14 per cent of existing jobs could disappear over the next 15 to 20 years, and 32 per cent are likely to change radically.

"Australia had one of the highest rates of casual workers among the OECD's 34-member countries ... In Australia, one in four workers is a casual worker, and more than half of casual employees report having no guaranteed hours, the report observed."

 

If it were only about the ceiling of prices? You still need demand to be stronger than supply. With investors out, I just cant see volume getting soaked up time will tell

 

So explain to me how the Great Depression ended?

Mere coincidence that several of the world's most powerful nations engaged in massive fiscal stimulus at the same time?

 

Even once they reach the new ceiling it still creates problems if wage growth stays really low.
High end areas might continue to see reasonable growth but the other 60 -70% of the market goes no where .
Unless the government gets really creative and only allows lots more immigrants into the country with bagfulls of money to keep the market trending upwards or open the markets back up for foreign investors that want to buy there way in.

 

This is a really, really good point.

In my other profession people often talk about automated tasks they have to manage as a separate skill set and that they should be paid more, however in reality it is making our profession easier than it ever has been.

I was also reading an article the other day about the automation of airport check-in which is being rolled out by Etihad Airways later this year using tech by an Australian company. Essentially, the process is fully automated to the point of not having to print out any baggage tags and you can even speak to the computer, in one of 50 different languages, to change flights, upgrade to business class or any other number of items that would normally require face to face communication with a staff member. It is currently somewhat automated, but not to the level this was describing.

The company rejects the notion that it will cost jobs as they claim that those people can be deployed elsewhere for tasks such as crowd control, wheelchair pushing etc.....but this is a fallacy. Airlines already manage those tasks using employees and if you wipe out 20 check in staff, you don't suddenly need those people for other tasks unless there is a commensurate increase in the number of passengers - they simply are made redundant in all senses of the word.

As AI exponentially takes control of our society in years to come, there will have to be an underlying economic shift that rattles how we do things to the core, in the same way it did when modern currency replaced barter and trade. It is yet to be seen how this will be managed - maybe AI can even solve the problem for us - but don't for one minute think that AI will simply integrate into what we have and make it easier. Things will have to change dramatically as people are needed less and less.

- Andrew

 

Hi Daz,

On the contrary.

Keynesians int the United States was asked to undergo major fiscal stimulus because they didn't know who was going to employ all of the returning soldiers. They actually refrained from fiscal stimulus and the 1950's was one of the greatest periods of US economic growth.

In Europe growth was easier because it was flattened and the US had all of the functioning factories.

If stimulus works, question for you: what caused the Great Depression, and why did it last so long (ie what prolonged it)? The Great Depression was the first time they had used stimulus and it wasn't until after the war and the stimulus stopped that the economy started growing.

Kind regards,

 

I didnt remember it like you state above.
I may be wrong. But the 40s represented also huge expansion. Even looking At 1933 an on.

 

You are spot on!
And believe me when scoping projects we always discuss redeployment of skills. The sad reality is that it’s either simply not possible OR their needs to be cost justification for implementing the software and often the cost of laying off an employee is more cost effective than the redeploy potential.

This is especially true when you have very qualified people whose jobs have been transformed into entry level roles.

 

No doubt! I’m not at all arguing we are in for a long period of stale growth without any significant changes to increasing servicing (wage growth, credit loosening) or significant demand increase (population growth)....None of which I can see on the cards for quiet a while.

I’m purely referring to finding the bottom of the market.

 

Low (or negative) growth & inflation is a logical consequence of increased technology & automation replacing human labour. And that's a good thing! Who wouldn't want to work less and live an easier life?

The last couple of decades, technology improved and automation rollout has replaced a lot of labour, but many of these man hours have been replaced with compliance, safety, etc bureaucratic roles which have grown substantially in both private & public sector. At least that is my anecdotal my experience in Australia.

However, this can only go so far, and eventually we will reach a point (or already have) where there are more working age people than demand for full time jobs, leading to flatlining incomes and growth. At present it seems to be playing out as underemployment/underutilisation (not so much unemployment) as work gets spread more thinly between those at the unskilled end of the chain. Ergo, human capital becomes less valuable and household wages stagnate or decline, which is what we've seen over the last 10 years throughout the western world.

But we need some inflation to keep the economy ticking over properly. It also seems fair to share the benefits of technology and automation with everybody in society, not just those lucky enough to own the technology or have skills that are still in demand.

Helicopter money anybody? Actually sounds like a plausible solution to both issues...

 

The United States in the 1940's was the only industrialised economy producing consumer goods at the time. That is why their 1940's GDP looks good.

Example: FDR bless him, was concerned in the 1930's that pork prices were falling. Given it was the depression this would have been extremely helpful. But instead of letting pork prices fall, FDR ordered he slaughter of pigs to keep the price up. This was fiscal stimulus.

 

@Rex good observation and post.
Technology and automation is replacing jobs but at the same time creating new opportunities for both highly skilled and those with minimal skills. We now have people specialising in social media earning hundreds of thousands, we have people now working from home making a mint selling on Amazon, we have people who couldn't get a job are now earning money driving for Uber.

As you pointed out though, this will only last for so long and we are only now starting to see the true potential of automation and AI.

The biggest one on the cards is car automation. I did read a stat somewhere but the amount of people employed in the driving industry around the world is astronomical. Self-Driving vehicles is no longer a back to future pipe dream, it is cold hard reality and its coming quick.
A lot of jobs will be created from this but a heck of a lot more are going to be lost. A lot of people in this industry do not have skills that can be redeployed.

I know global warming is a big issue but automation is one of the biggest if not biggest challenge we are currently facing. Just listen to Elon Musk talk about AI, he is generally very concerned.

 

It is all a good thing though, IF we can get the economic setting right to look after those impacted and share a bit of it around. I'm no socialist, but I can't see how else this technology transition can realistically be managed. Big if, it could all go very wrong if it is not managed correctly.

Although this is looking a bit further afield, if technology and automation ends up doing half the work that humans used to do, that's great. We collectively have a whole lot of extra free time, everybody works a 30 hour week with 3 months annual leave and we all spend more time with our kids or watching Netflix. I'm fine with that, that's the dividend of technology - robot slaves that do the hard work while we put our feet up.
It just means that the state potentially has to provide a bit more of a supportive role, through direct payments and/or structural changes to the workplace and labour market to adapt with the changes. Instead of 20% of the population just losing their jobs and sitting on the dole in poverty doing nothing while governments scratch around trying to invent new full time jobs for them.

 

Spot on!
I am optimistic that longterm automation will create an amazing opportunity for humans to work less OR should I say work on more meaningful and creative things to keep improving our quality of life.

I also think at some point we will create a system that will allow for this to occur.

Where I worry though is the transition and unluckily for us and even more so our children we are just entering the point where it’s going to get bumpy and we are not equipped for it yet.

 

^ hate to burst the bubble, but I doubt thats true. I'm relatively young in financial accounting and analysis but have very experienced colleagues who started around the time when things were done in ledger books, sign offs are on reports printed out on dot matrix printers, quarterly results and forecasts faxed to global headquarters etc. Back then, a deadline was a deadline. There was only one final version of everything - no redoes cos the boss sleeps on it overnight or constant tweaking or creative accounting. You don't take work home because you can't. You aren't on call 24/7, you don't wake up at 3am because colleagues in US decides to do a conference call then, you don't wait until 8pm for work to be done by the transactions team in Manila or India because they start work then and all functons are now centralised.

Tech has done wonders for productivity. We save time in doing tasks, but with the saved time means we can do more work ! We're doing more not less