More doom and gloom

Interesting reading... https://www.smh.com.au/business/the...tack-is-just-months-away-20181220-p50nbk.html

Great line here - "Welcome to the Grand Finale of extend-and-pretend, the worst monetary experiment in history"

 

It's a helluva prediction.....

 

Yep...and the probability of it happening is quite low.....

 

I thought historically there was about a 50% chance of the Australian economy taking a big hit when the US started to aggressively raise interest rates.
With RBA rates at 1.5% , overpriced real estate, flat wage growth and high debt levels amongst households , I dont think we are in a good position to really deal with bad news in the U.S ,China or even Europe.

 

This article on the back of the 5 I just read about strong recent wage growth and low unemployment.....

Just imagine you didn’t know how to make your own mind up...

 

Something like 40-45% of the jobs that have been created since 2013 are part time jobs.
Around 40% of new jobs have no leave entitlements,and these people can be let go at a moments notice.
For many its a simple as telling them they are no longer required and today in their last day , or dont come back on Monday.
Real wage growth since 2013 has been woeful, another reason why the banks had to crack down on lending standards.
Many of the job losses start to happen once you go into a recession and I would imagine the construction industry would see some bad falls in employment levels once the full effect of the credit crunch comes into play and its pretty high up the list with the amount of people that it employs.

 

Jeez that is a depressing article. But seeing more and more of these. The tone is definitely shifting downwards in global outlook.

If half of that plays out there will be fantastic buying opportunities for equities, good time to be holding cash and ready to buy.

 

Hence why casual conversion exists.
A large majority of the temp workforce can choose to become permanent staff members, obtain leave entitlements and forego casual loading.

 

Explain this casual conversion to me. Industry I work has large numbers of agency casual staff all working full time hours consistently, majority want permanent but it takes at least 5 years to even be considered. At least they get their long service leave I guess

 

Part of the problem is that the permanent staff know that if they leave there jobs(and possibly create a job for a casual) then they will probably end up in a casual fulltime position , but with no entitlements and absolutely no job security, for many they are paying big mortgages , so they just stay put.
The first to go are the casuals , even when work is quiet for the day , you can be asked to knock off at lunchtime, just keeping your job is good ,but dont get to far ahead of yourself and even think about asking for a payrise .

 

It is a very bleak article, but i think it does put a good spotlight on one of the biggest macro issue facing the world - debt cycle contracting.

A massive & fast liquidity & credit contraction that key central banks are going through around the world can easily cause chaos.

You'll see companies true state of affairs etc when debt conditions normalise...and they have pretty quickly this year. Fingers crossed its not as bad as the article suggests.

Play the same scenario out locally, what if the RBA raised the cash rate to 3.5% inside 12 months next year & took bn's out in liquidity (can't really do this here but assume its another 0.50% or something). I think Australian households would suffer...bigtime.

 

It is particularly pronounced in Australia. Personally...I think APRA should be loosening credit now with going overboard!

Here is what I would do if I put my policy hat on:

1. Allow the banks to extend I/O for people up to 10 years.
2. Reduce the assessment rates for serviceability from 7.25-7.8% to 6.5%...it is too high!
3. Ease up on Investors but not too much.....

Housing has a huge impact on the economy...by just doing the above ...the RBA may not need to reduce rates for any more stimulus.....

 

Not every Award is entitled to casual conversion (a large number are). But if you work continuously for 12 months you are entitled to go permanent. This means you receive all leave entitlements including redundancy.

Most people don’t take it though because it’s a pay cut. The 25% casual loading when calculated is more valuable than the price of entitlements.

 

depends... many companies have extra redundancy policy, often they double the standard entitlements. In case of acquisition (which also happens these days) and following redundancy they also often pay various retention bonuses to make sure migration is complete smoothly. These entitlements taxed differently (lower). Plus company share options, long service leave and other bonuses available only for permanent employees. So for many employees, in long term, it is even better to be permanent than to be a contractor with top rates.

 

Maybe they know something that we , the

The permanent staff at the company I currently work for actually earn more than casuals , they also get paid entitlements and 9 day fortnights..
Casuals are just paid market rates that are currently in play, and the last permanent staff was taken on over 5 years ago , but they will churn through many more casuals.

 

Yes when I was writing my post I was going to put a ****. The reason being is that most people tend not to forward think to redundancy. They think I’m currently getting paid $50 an hour and when I convert I’ll be $40 an hour.

 

In our experience, employers find every conceivable excuse to get out of paying redundancy payouts.

 

@Redom and I have proposed/ discussed similar things regarding assessment rates some time ago... but the proposal that IO be extended to 10 year availability en masse again isn’t something I think makes sense - it only ensures that borrowers hit a 20 year P&I migration rather than 25 years... most have struggled dealing with a 25 year migration ( and we aren’t even 1.5 years into it yet) so deliberately creating large numbers of investors rolling to 20 year P&I seems stupid and dangerous to me

Living Expenses would appear as though they are only likely to get tougher . It’s always possible the royal commission won’t drive tightening in this area I suppose - but that’s probably wishful thinking . So really , if there’s going to be any relief to current settings it would need to be around an easing of assessment rates.

Debt needs to be paid down though. Policy settings shouldn’t seek to return to a market driven by speculation. So discourage speculation through a return to long term IO , but encourage things by improving borrowing capacity through more generous assessment rates .

This would still encourage a mass migration to P&I and facilitate deveraging , while perhaps keeping prices stabilised ...

I guess we shall see ...

 

Speaking recently to a friend who writes loans at one of the big 4, he believes a rationalising / relaxing of expenses assessment will be the next move to open up housing credit a bit more, and maybe some sort of grandfathering of serviceability assessment and/or turning a blind eye to valuations for refinances in a world of declining equity. I tend to agree.
Once all the hysteria of the Royal Commission has passed (and it will all be a distant memory once the Aged Care RC starts), APRA and banks need only quietly move back toward relying on HEM or similar a bit more and forensic analysis of bank statements a bit less. HEM has been 'tweaked' a fair bit over the last year anyway I'm told, to be more conservative and fit for purpose.

Reducing assessment rates - maybe, but sounds a bit harder to publicly justify.

 

HEM will not happen. There is no way in hell APRA would allow HEM again. There would probably be a relaxation though through an approved benchmarking mechanism that APRA would authorise.

At this stage things are hard because everyone has to come up with their own “true and reasonable “ benchmarks. So bank err on side of safety. If APRA comes up with its own benchmark would be much easier for banks.

To be clear though, any benchmark would be still much more reserved then HEM.