All right, Jared welcome back to religion, thank you great to have you
Um, she'll kick off with an update on ours sure. It's getting interesting
I mean the bees have known the outline of the the bear case for some time
Which is quite simply the world's most expensive housing stock. I guess outside some small steez city-states
A hugely indebted consumer that has no saving
And a reserve bank that's got very little room to respond
If anything goes wrong now the outlines
there have been some positives that have kept us away from the precipice for some time and what I'd focus on over the last
Four or five years is first and foremost population growth. It just keeps the wheels turning over
It means that it's not clear. We have a huge excess supply in housing. I'll give you one stat
The rental vacancy rate is below average and falling
It's generating demand for infrastructure
And here we are in city and all the roads being dug up as part of the spending that's doing so that's an offset
Another important offset is the mining capex boom and it did boom
then bust but the bust has almost run its course, so
Mining capex is a share of GDP went to nine percent at its peak. It's now back at a little below three percent
So it's subtracted six percent in GDP over the last four or five years
but that's probably now the floor for it and there's a few other positives you can throw into the mix such as
we continue to deport our tertiary sector that means more foreign students and
Statistically by saying a lot of LNG will add to GDP growth. Although it's fairly calorie light growth
It's not going to add much to anything
so what we've been going through the last I guess 18 months is
The housing market starting to soften with the consequences that growth is starting to weaken, but we've been kept afloat by these positives
What's happened over last quarter or two is we're seeing signs that the downdraft in housing
Borrowing and wealth effects are starting to build steam and that's making an increase in you like there'll be a recession now
I'm not making recession my investment base case yet
But if we were to get another two or three months of data
Like the sort we've had over the last two or three months and I think investors should make recession their investment based case in Australia
And if we were to see a recession trust me, it would be world's best practice
This would be disaster given how indebted we are
How expensive our asset prices are and the inability of policymakers to respond. That's if we get a recession. So what's the odds?
Well, I mean the things to watch supply of finance to housing
I mean when you have house prices as high as they are in Australia
The demand for housing is just a function of the supply it credit
house prices themselves
Building approvals now despite the population growth the fall and approvals over the last
Four months has been large enough to suggest that residential construction will probably subtract about a percent from GDP
over the next 12 months
But then the big one but this is also the big unknown is is the wealth effect
So it's quite clear that because house prices have been on this rampant bull market for some time
Australians have been willing to reduce their saving
According to the Bureau stats, we're now saving about two percentage points of our disposable income, but it's worth recalling
That on the income side
the statistician includes the compulsory pension contributions the employers make
Now once you take that ad into account and sort of in a sense pull them out of the numbers
The saving rates effectively negative if you're saying well, how much do you save out of what she actually trousers or every week?
I'm actually overspending
so if the wealth effect is strong enough in other words, if people
Adjust upwards. They're saving right fast enough as house prices fall then
Then we're toast
In particular if we follow the pattern that we saw
economies that experienced material house price
bubbles and busts in the GFC
what they saw an average was around about a two and a half percentage point increase in household saving e
2 & 3 after the house price peak
Interestingly the saving rate continued to fall for about a year after the house prices peaked in GFC
Much as the saving rate continued to fall in Australia last year
Even though house prices were falling if we see that two and a half percentage point adjustment
That by definition means spending has to grow lower than income. The trouble is in Australia at the moment
Real aggregate nominal a real aggregate disposable income growth is roughly zero
So if you're going to increase your saving with no income growth, you've got to cut your spending. So that is the recession scenario and
Interestingly if you're looking for early hints that it's starting to unfold
If you look at spending at the state level and I like to look at spending per person
So that I don't get confused by some of the interstate migration numbers
Spending over the course of last year in Western, Australia
capital cities Perth
fell
Now what's interesting that bad is?
House prices in Western Australia both in Perth and the regions have been falling for two or three years
In other words if anybody in Australia is at the stage
Where households staving right to start to drift up. It's the West Australians
Now this is circumstantial evidence. I have to use that because the statistician doesn't publish the state level saving rate data
So I can't just reference that, but it's interesting that it's clear
That consumers are weak in Western Australia on a per capita
Basis than anywhere else and they are further into this house price decline than anywhere else
and if the rest of the country follows that pattern
Things will get worse in the second half of the year
And as I said investors need to make a recession their investment based case
Do you think the Royal Commission let the banks off?
I don't think the Royal Commission did but I suspect the politicians have I mean speaking from the man on the street?
It was just staggering to find out just how big a gap it is
between punishments when you rob a bank versus where in the bank robs you
I'll tell you what if I was ripping hundreds and millions of bucks off people
I wouldn't be getting a rap across the knuckles and please don't do that again from the regulator. So
even if
We don't crack down hard on the banks for what they have done
Surely surely that are where now that every politician would love to hang one of them high in a tree
For something they do going forward
And you would think that that's one reason with singh's credit
Contraction, but guess what? They're actually starting to check things and one of the other surprises from the Royal Commission
Was that yes, we do have a lot of Lyle owns in Australia
but unlike an America where the line was done by the borrower's here more often the knot was done by the lenders or
Endometriosis or intermediaries their agents. That's right. So it's part of the reason we've got this
Decline in credit provision, which is feeding directly through and weaker house prices seem to be having before the real Commission knows it started
I think that's because if you look at the detailed numbers
The initial decline in credit approvals was for investors, right? And initially that was a
The desire of the Reserve Bank in a purr in particular to slow the lending for investment
Properties and they did actually put a cap on him
Now that started to come into a pact impact two and a half three years ago
the new news just over last six months has been they're rolling over in lending for
Owner-occupiers so this is upgraders and that's where the Royal Commission
Fingerprints are all over that
Now the uncertainty is this
Is that recent decline which started September we only have data up until January?
Is that a permanent tightening of credit standards and will we continue to see credit aggregates continue to slow?
or is it simply they're put in place new processes that are extending the loan approval system and
What we're simply observing at the moment is an air pocket
But once people get through this more extended process the flow will resume at a more normal rate
in a couple of months for a soft landing
That that's just planning scenario. That's where your credit approvals start to inflect move a little higher next couple of months
If there's going to be a few we've seen this, but if after that you then get people going you beauty
House prices at ten fifteen percent lower now than they were their peak
So I'm now willing to borrow again and put a put a floor under it. This is against the backdrop of
Still decent unemployment rate. I know
That's that's just soft landing scenario. That's where we start to see the nosedive in house prices inflict
We then get a sense that house prices peak to trough nationally will not be falling twenty percent
They'll be falling perhaps at fifteen percent
But once you get that sense of soft landing with a few other goodies from the government
We have a slowdown. I mean, we don't support a slowdown here, but we don't get it tipping over the edge to job losses
once you get job losses
that's that's the dynamite stick into the pond because there's going to be a few things float up and
It's worth recalling in Australia that what we are now seeing
With house prices declining is the first decline in nationwide house prices
Not associated with either RBA rate increases or a rise in unemployment
now if we were to get out of those things
We weren't forgetting RBA rate increases. That's for sure. You start the rinse and repeat cycle all over again
You get a second leg down in house prices
in my view is without any
Rise in unemployment. We're probably talking about a 15 to 20 percent peak to trough decline in capital city house prices
Which is the average in previous downtown's Rite Aid's it's at the high end. It's at the hind
But yeah, I mean it's not unprecedent. It's at the hind
If we were to get job losses, which is green shooting at the moment
It's not the rate of change is not particularly in employment. Ya know
It's okay, but I can point you to a couple of things
Some of the leading indicators are starting to weaken
If you look at hiring intentions individual corporate surveys if you're a good job advertisement
So the aims did all the the government's use just counsel number of vacancies. They are clearly
Turning over there not yet at the stage of signaling outright job declines
We can see evidence that we like to see outside
Outright job declines is actually now in the construction sector because guess what building approvals gives a pretty good lead on
How many traders are going to be in employment about nine to twelve months ahead of time and where we are now?
It looks like you will see construction sector employment decline
Later this year now, they punch above their weight because these are better paid jobs
So there probably will be some weakness but I do agree with you
I'm not yet at the stage of being a point to leading indicators that tell you you will see you aggregate economy-wide job losses
They're not there yet. And that's why the intermediate stage you need to go through is the wealth effect too weak in the consumer
Then you are likely to see those leading indicators roll over and that's why
procession starts to become
The base case we're not there yet when we are there your favorite short
It would be the current stealer banks or banks until before a dividend cut have I got the option of all the above? Yes
I mean, I think if we had a recession yeah cash rate to zero, you know, ten-year Treasury below 1%
The Aussie dollar was sixty
And and the banks get smoked
Now the sequencing I mean the RBA cuts probably I guess come first
We're at 150 basis points with the cash rate target. But of course the market is already pricing in a couple of rate cuts. So
It's almost as if now just simply to have more of the same more of this tepid
anemic growth
Which probably does get one or two RBA rate cuts this year is what's in the price
To be bullish as he short rates you need increasingly to make recession your base case
So they put push the cash rate below below one
Which they for sure would and a recession scenario the currency give way now. What's already interesting about the Aussie dollar?
Is if you look at how its traded over the last six months
versus that you usual
commodity price barometers
It's actually underperformed basically versus I know it's right specifically I know but if you took a broader basket
It's still underperformed if you look at how its performed
These are the interest rate differentials and I always like to use not the spot
Cash rate targets I use the futures so that captures the anticipation of policy changes
The currency has been stronger than you would have expected. So obviously what we're seeing at the moment is this tug-of-war
In the Aussie dollar behind on the one hand
The currency differential which is pointing to a lower currency and commodity price is pointing to a higher one but in a recession
It's not just an interest rate differential story that starts to drive the currency its concerns about credit
and people actively taking short positions as opposed to
Just going back some pre-existing long positions
It's kind of likely to be a global recession and was gonna be a race to the bottom right for the current season
Well, what's interesting here under my world view at the moment is this could be the first?
Unilateral or solar Australian recession
Ever well the 1961 credit crunch is arguably it Bob Menzies credit crunch
But no be very interesting. It's interesting from an equity perspective because
the Aussie dollar in a recession a global recession is obviously
high beta so commodity prices get sold off the currencies down if you're a local fund manager within a
X200 benchmark your natural preference is to go to stocks that have foreign currency exposure, but not the miners
Because as global recession the commodity prices are getting hit we're interesting. This could be almost the perfect
Barbell scenario for being long the miners
Because their commodity prices may hold up and you get the benefit of the Aussie dollar down. This is the banks
because in this scenario it's where they cut their dividend and
in one thing
I think these under appreciated by some offshore investors with our so-called franking or dividend imputation system
just how attractive
equity offering a 7% dividend
to a local like myself
franking Frankie
if I buy a company on a 7% dividend yield and
Assuming they're paying the full freight on the corporate tax rate, and I'm on the top tax bracket
That's like a pre-tax yield to me of low double-digit
Now
with a lot of self-managed superannuation pension accounts buying stocks with those
characteristics
That offers a lot of support and if you look at the banking sector over the last two or three years
and it has been underperforming versus a local benchmark for the third period it keeps on bouncing off a dividend yield a 7% and
That's your support under the soft landing scenario
but the converse is if a lot of people are holding an equity because it pays a dividend and
Then it cuts its dividend Telstra. It's all over now
It's not broke, you know, but it's a great short now. That's probably in the sequencing of how you would play a
Recession that towards the back part of it
But of course if you shorted the bank's unhedged and you've got the currency kick
That gives you some comfort even if you've got initially some some expensive carry to hold those banks as a short
I should think the offshore people have been disappointed in their shorts in the banking sector down here. That hasn't done much. No, right
No, once you take a can of turns be resilient to the currency and in the carry, okay so far. It's been
Probably a wash they would have been better finding something else to shore I guess is the way to put it
So it's what timing is important and that's why what's interesting you've seen?
But the right market move from saying earrings
Okay in Australia, which is where they were a year ago the start of last year
The right market was expecting a couple of RBA rate increases
Too now saying it's not so good. In fact now the RBA is going to cut
So you've already made money
By taking a half glass-half-empty view on the rights space
And indeed even on the currency space. I mean at the start of last year, we forget the currency was over 80 cents
So there's been an adjustment there as well. It's the banks where?
It's more of a binary trade in the sense that there's not been a lot of money made from people going
Yeah, this economy's softening
The real money is going to be made when they go and I proved correct in saying it's a hard landing
So the banks are more binary than some of those other options to try
Ozzie macro disappointment who's the first to cut that evident? My view is it's
It's what what deck of the Titanic are you on if the ship hits the iceberg? Let's not fuss about it. They're all going down
Yeah, one hazard a guess and and for me it's it's not that pertinent
I think they're all as a basket just short a lot of them. Yeah
The one thing is, I don't think they go bust come in. This is this is a trade on the back of dividend cuts
What what has been the world's most expensive building societies, which is all they really are
They've already raided they candy rate further. They'll take an earnings hit and I'll take a dividend cut
Now that gets you a fair way lower
But I wouldn't I wouldn't play them to the death
There will be a level where you need to say. Well, I've made my money that's
They're not going to do a
Sum of the GFC Lehman style go to zero
No
When the are they put a lot higher strike order thought well this right we know from the GFC the playbook they guaranteed the deposits
For a fee they guarantee. They're also funding so effectively the
Sandbag that side of the balance sheet. There was a bit of helicopter my hair wasn't there
I wasn't quite not what I'd characterize as helicopter money what they undertook was to not just to Harvey Norman sort of thing. Remember?
Oh, sorry on the fiscal side. There was no no that was absolutely essential. Look the point about the GFC in Australia was
Everybody say it was China that saved us. I think that's complete bunk. What saved us was lumens going under
Lehman's going under was the rainy alarms for the policymakers at the time and they were super
aggressive in terms of
Fiscal expansion which is yes helicopter money
And rate cuts. Now what that meant was in
2009
The year the world was on its knees
We had
Aggregate
disposable household income growth of 9 percent
9 percent
Well, that's a GFC. Let's have one every year
Now that nine percent. I used to mate that policymakers contributed 8 percent now that got us through that
That horrible three quarters from from Lehman's fall
To the inflection in china's growth indicators by the middle and second half of 219 pass like Canada. The banks weren't doing anything particularly
Sexy down here. They weren't gonna get themselves in trouble. But in my present basis, they didn't need to this is the remarkable thing
I mean with risk weighting and you set your own low risks weights
Yeah, why do why do all this staff stuff like the gems you can safely?
Homebuilders since homebuyers. Sorry in arrow easy, right the 20% plus. Yeah
So and so long as that didn't blow up
They weren't do anything stupid
I mean when that does blow up we're gonna say what Muppets what were they doing that but you need unemployment?
to rise for that to happen, you know, I've been a real vision subscribed for a while and
I have to say I'm probably one of the you know biggest perma bears according to warm
I'm a it's anyway, that is in the land
including having sold the house down here for example, but I mean I
Need to have some bullishness coming out a real vision
What have you got this? Bullish? I'm bullish you pay in Japan. Look, I think there's a secular story there that
Investors are not paying attention to in fact
I'm in mind marketing with my clients on I'm amazed of last year. It's not that people. Love Japan
It's not people hate Japan. They just don't talk about Japan
Now I've been bullish for two or three years
It hasn't paid out yet
But I'm gonna stay bullish until it does and let me give you a quick sort of run through of the of the story
It starts first and foremost in my view with the improved capital allocation of Japanese corporates
Historically particular to go back to the 80s, but it was still true in the nineties and even into the naughties
Japanese corporates just invested way too much
Relative to their earnings and as a result, they had terrible roas now they put a lot of lipstick on that pig
By being massively levered and that's how they got half-decent
ro EES
They weren't great that they were
The gap on an arrowy basis was a lot narrower than the roa gap and that's as I said this massive leverage that they had
Well, that's all changed
they virtually
Removed the ROI gap to the rest of the world
Unlike virtually every other corporate sector which has spent the post GFC period or leveraging up Japanese corporates have been deleveraging
There's an avid now massive gap between the their profitability and their capex in fact
Their profits as a share of GDP in listed sector is now at an all-time high
Capex is still quite anemic, you know the gap between your profitability and your capex is ruffle. Roughly, roughly
You're operating free cash flow. So they're spitting in aggregate and almost amounts of cash off. So that's how they pay down their debt
That's how they are shoving auto cash under mattresses
That's how they're increasing their dividends and God bless them some of them even doing stock buybacks
The proof ultimately is in the pudding and they have out burnt the rest of the world over the last five or six years
I've had better EPS growth than the rest of the world
But they have not outperformed. Yeah, if you grow your earnings fast everybody else and your stock price doesn't do better than really else, obviously
evaluation must have
Compressed and Japan's gone from a long period of being a premium market
probably without any just reason for that to increasingly trading at a discount on a lot of
market wide measures
So I like Japan is my favorite all-weather market for the next two or three years. I think if there is a global growth acceleration
as as usual because it is a cyclical market will do well, but even if things remain quite anemic these underlying
improvements in returns
balance sheet strength
And earnings at some stage should get some recognition from global investors. I guess the offshore
Real money's been giving it to the Bank of Japan. They now own 80% of the ETF market these demographics are worried
There are a few things off shore that the currency probably gives people the willies some extent in terms of indebtedness. You used to know
Let's address those in order. I think what we're seeing is partly Japan Inc at work
The BOJ and the GPI f
Which I think is still the world's largest pension fund now the GPO F is doing a massive asset allocation switch
Added bonds. It was overweight. Basically overweight JG B's into equities
Now if they had had been anticipating that and in a sense, it was a no-brainer trade
Four or five years ago when JV beans were already
You knew they were gonna offer you basically no returns because the yields would guess what no yield
versus equity that we're looking attractive now if you the GPI have sitting there going how
am I
The world's largest holder of jg B's gonna get out of this market without butchering
My own book and the BOJ comes along as his OB big by repeal of equity bonds for you you go
This is a marriage made in heaven
So effectively one way to look at what the BOJ has been doing is facilitating is massive asset allocations
Which by the GPI F now in that context?
They're purchases of equities that Bo J's purchases or equities are actually quite small on an absolute basis
Relative to what the GPI f is switched into yes. Yeah. Do you think that should be ultraverse?
Should they be able to buy equities? No, I look I think it's unnecessary
I think it's unnecessary
But adrift sent me rather other concerns firstly the debt concern the public sector debt concerns, hugely overrated
And if you look at government debt to GDP on a gross basis
Last summer. I looked it's about two hundred twenty percent of gdp. So it's the number we used to scare the children
on a net basis
It's closer to 100. Once you take care bo. J holdings. It's about 40 percent of gdp. I
Mean they don't have a debt problem anymore. It's it's been taken away the BOJ
Means net jgb is outstanding outside the BOJ native the assets
the government's got is very manageable and ultimately next time they stimulate they probably shouldn't even go through the shroud of
Issuing jg B's they could just print money
The demographics are likewise our demographic zero concern obviously Japan's
Demographics is one reason they have had trend growth, but let's not confuse, you know an equity market within an economy
The big change
That's maybe bullish on Japanese equities are all about the improving return on assets and return on equities
For the Japanese listed sector, it's almost unconnected to their economy. And in fact if you look at the sales
Reported by the listed sector compared to Japan's nominal GDP growth for 20 years
But completely unconnected I've disconnected and this is one of the reasons why over the medium term
there is no correlation between GDP growth and equity returns, which is why if you look at for example
China the world's fastest growing economy for 30 years
It's giving you fairly ordinary equity returns over that period so I'm not fast about the debt. I'm not fussed about
The the slow growth or the demographic
So I think the story is elsewhere and the the currency well depends how you're worried about it
I I normally look at these things on
a common currency USD return basis when I do my comparisons and
What we've seen is effectively
It's a hedge when the yen weakens
The the yen value the local currency value the index goes up and vice versa all becomes a bit of a wash
so I'm not that fast now the multiple mentions of helicopter money brings might bring me to the
MMT story, which the Twittersphere has gone mad with over lake hayes
it has I think it's I think it's the theory for the times that are coming and
I think there are two
big shifts that pointing to mm to or some variant of it
becoming the main policy response in in the next downturn whatever the next downturn is the first
Point that supports that shift is that we have exhausted monetary policy
We exhausted conventional monetary policy last cycle because we hit the zero lower bound
then central bank's tried to
unconventional tools
the one was quantitative easing which
They think worked I don't think it did certainly not as an economic stimulant but debate what impact it had on financial markets
But I don't think it worked as an economic stimulant. But if we take them at their own face value, the central bankers are saying
That QE as an economic stimulant has diminishing returns
Now it's got diminishing returns. Just think about the math seen
last cycle they were able to deploy some conventional rate cuts and
Then the big four banks lifted their balance sheet to around 16 trillion dollars
now if you wanted to
provide all your monetary stimulus next cycle via QE
You'd have to step up more than 16 trillion because you've got no conventional room to move
So all the load gets taken by QE plus you're telling me mr. Central bankers got diminishing returns
So what's the number we have to do next cycle?
32 64 trillion. I mean what's usually running there things to buy so I think QE is a failed experiment
The second unconventional tool they deployed last cycle was negative interest rates
Now this only became in a few what I'd characterize as boutique interest rates
I think it too has been seen as a failure because it complicates life for your financial intermediaries
Which after all or the channel by which?
These monetary policies meant to make it into the real economy, but then I think we started political limits. I mean, can you imagine?
how voters
Pensioners would act if they really were receiving negative interest rates. I
Mean, there'd be a lot of tweets to mr. Trump saying, can you tell Jay pal to get his hand out of my purse, please?
But this is not tenable politically
So the first reason 15 we're heading towards MMT is we've exhausted monetary policy both. It's conventional and unconventional
variants
the second this is what I call the the theory that suits the times is
The huge political pendulum swing that we're seeing
From the early eighties. We really had a thirty-year political swing towards call of our will
neoliberalism the devil's consensus the Washington Consensus and it's pretty obviously that's swinging back and
The way it's swinging back. It will suit the people that arise riding that pendulum swing back to be able to advocate for
physical policy
Because physical policy in this context is not just a demand management tool
It's a tool for achieving other other objectives
now in this context
MMT as a descriptive theory, let's forget about its prescription. Just talk about it as a descriptive theory
Strikes me as a little more than a statement of the bleeding obvious
If you issued debt in a currency that you have a printing press fool you don't need to default statement of the obvious
Secondly economies have capacity constraints
Statement the obvious
So that's two seemingly pretty innocuous statements
But once you agree with those two precepts
It completely tips on its head
The conventional notion of why you tax the conventional notion is well, you can't spend without taxing
Well, if you just agree those two points then spend my printing you spend by printing and the reason you tax
Is to prevent the private sector competing for the resources on your back
So it completely inverts the way you look at things now
In theory, but it's domestic. We're thinking you're kind of ignoring international trade
I don't think you need to I mean
As with conventional monetary policy if I was to unilaterally special interest rates
I know that would have a consequence for my currency and presumably I would adjust how much I adjust adjust
how much I cut rates by to take that into account now if I was to undertake mmt which is
You know money printing fiscal policy and the active ingredient here is the fiscal expansion
That's why QE was not MMT. The active ingredient is collects panshin if I go, look I
Ordinarily need to do let's say a five percent of GDP stimulus to get myself back to full capacity
But I know if I do that 5% stimulus by currency will drop 15 percent
Well, okay
I'll only do three and
Have a ten percent currency drop and that's enough of an ease in financial conditions if you want to characterize it as that
Keep my objective, which is having an economy running at full capacity
So I don't think there's anything novel in that. In fact, I even think
What you could see is a system where for?
Sure the central bank
Is corralled into supporting fiscal policy and you could have an agreement between the Japanese government?
Let's say and the BOJ
That the BOJ will under every circumstance
commit to
purchasing 80% of all jgb issuance
It's probably down once they do it
Already there, so that that's your mmt component and then mr. Robie can ramp up his fiscal policy to
Achieve whatever objective he wants but you could at the same time say to the BOJ
But you go ahead and set interest rates to ensure you hit your inflation target
Because that ultimately can be a constraint on how much
Mr. Our Bay will print he's knowledge that the BOJ could lift interest rates
to maintain the inflation target so that you preserve the
Monetary policy independence of central banks, even if you make them subservient to fiscal policy
Yeah, that obviously raises the point that you could have a tension between monetary and fiscal policy once again
Nothing novel there last year. We had a big fiscal easing in the US and the Fed was ramping up rates
So that sort of unusual at all and it shouldn't in theory create any
predicaments
Now the issue with all this uses in theory
It should work in
Theory communism is going to work so we know in a practical sense. There's a lot of potential wrinkles on this
All I would say is a card-carrying secular stagnation
Astiz what I am
This is kryptonite
- secular stagnation if we fully deployed
Open-ended Central Bank support the fiscal expansion
Is the day I get my secular stagnation membership card, and I handed him. It's all over now
That doesn't mean I automatically become an inflation Easter
It certainly doesn't mean some of the ludicrous comments people make about being on the road to Venezuela or the Weimar Republic
They're true. None of that is true
In fact, he's one trade go long straw because there's gonna be so many strong men demolished inside you you've got to go long
so it doesn't mean I necessarily believe in that but obviously if I'm looking at inflation risks on a five-year time horizon and
Through most last ten years
The fat tails been a left-tail
That we get dis inflation or disappointing inflation the day we adopt MMT
The right tail becomes the fat tail and evens my base case remains that we have
acceptable
Inflation the balance of risks has shifted and that would start to affect asset prices and how I would trade the market I guess
It's the neoclassical economic schools in every Treasury in the world is gonna be not willing to do this. I'll change them. Oh, yeah
What was reliable is if you had asked those treasurer's all those central bankers what they would have been willing to do
In 2005 in the next downturn I bet you know them said negative interest rates are queuing
It's amazing how a hanging concentrates the mind and that comes back to why I think it requires another crisis
to get policymakers pushed
Towards this but look this is not coming out of the blue. We've got to remember people like
Ben Bernanke have already made speeches about
how
Fiscal policy needs to take the lead in the next cycle and mr
Bernanke even went to the stage of proposing something along the lines of
regular FOMC meetings a green on the quantum of deposits
They would hand over to Treasury for Congress to then spend
So this has been broached before by some?
respected
Policy makers and it comes back to why would we go to those lengths?
we've got no other option in terms of conventional policy response against the backdrop where
the masses are angry and
think of this way
Japan has led the way on most of the trends that we've seen in developed economies for last 30 years
and I continue to think that Japan's likely to be the first cab off the rank in terms of our fiscal expansion supported by
Central bank balance sheets. There are this fantasy in the next downturn. We we have an R by
Kuroda press conference, they start off by apologizing for missing their inflation target again for the 20th year in a row
But they then say look
This is mr. Robie, I'm going to expand the budget deficit by 3 percent of GDP
Mr. Kuroda this morning the positive back cash in the government's bank account
And I think in a year's time that will accomplish our 2% of inflation target
But I'm telling you now if it doesn't the 3 gets dialed up to four
If that doesn't do it four becomes five
You see where I'm going. In other words what we have here is a
Whatever it takes comment
But not a Mario Draghi, I will do whatever it takes to
Douse the sovereign debt crisis in the periphery of Europe. This is a Kuroda comment
I will print as much as it takes for these guys to spend
Hit the capacity limits that at some stage will surely get us inflation
now
The day that happens, you know, there's going to be whole lot of editorials in the financial press
Poofiness there's gonna be a whole lot of people saying, yep. They're on the road to Venezuela, but tell you what if it works
The next time there's an election in Italy
Why wouldn't someone say this is what we're gonna do
Why wouldn't Jeremy Corbyn say I told you people's QE would work?
He's the example and it starts to spread and if that all happens in next tools for years and the US has a recession
Why wouldn't mr. Try who by this time is made of Anka chairman of the Fed go ahead with it
Well by this time the dog has gone through the roof
So he really needs to do it
Oh, yeah, I mean if they're talking about paying the universal basic income up with ETFs in Japan, you know, I mean, yes
You know, the scheme is over completely the debate of how you should spend the money and that's a political thing
And of course part of the reason there's such pushback - mmm teas. It's got tangled up in
specific
policy proposals and
I'm not competent debate hair allistic they are or not. It's probably irrelevant to investors. But as a demand or cycle management tool
the would be able to
Get us to inflation
I think it's it's obvious that it would work if done with sufficient vigor and that's why I only pointed to make two investors
Let's not get hung up about the specific proposals
They are making to how to spend the money
Let's just focus on the fact that if they do this in size we can get inflation in other words
None of this is none of this
removes the causes of secular stagnation
The the high debt levels the inequality the globalization the tech development whatever all continues to operate
But it's an antidote to them. It gives you symptomatic relief
That means you can push the economy hot enough at some stage. You will get inflation to move on to China from Japan. Yes
No, there's a place tune in Japanese. He's bidding you'ii go on just in terms of rate of change of
Leverage and the size of the last year an increase of that balance sheet
The leverage is a macrocycle concern, but I don't think it necessary means they have a really hard landing
as long as they can I think they've satisfied two conditions, which is
Most of the debt is are in be denominated debt
and as long as I think they can control their capital accounts then if that debt does cause
Too much problems too. Much stress too much financial stress. They have the solution. It's got a printing press and
Because if we groove the premise that most of the dead he's domestically by domestically denominated
It's irrelevant how big FX reserves are I mean the fact that you've got a pile of USD is no help
We've got a us you've got our envy debt problem want to help we've got an r&b debt problem is an RMB printing press
Yeah, it wouldn't be pretty it wouldn't be elegant but doesn't mean that they will avoid that left tail risk of a a
Layman's moment or a Minsky moment
So the good news with the Left Tower, which I don't think is particularly large
Then you come back to the more vanilla risks of what they're trying to do. And on that front the way I see it
There's there's good news and bad news
The good news is that the way they've tried to provide some cycle stimulus over the last 12 months
Has been more consistent
With their longer strategic aim of rebalancing the economy away from exports and capex
Towards services and the consumer that's been their strategic objective for some time
It made no sense
If you were trying to get away from capex and towards services that in
2015 and 16 you stimulated by by focusing on capex all that did I mean it got to a short term sugar hit for GBP?
But it added capacity in a world that had too much capacity and therefore
exacerbated their disinflation problems when you had a lot of debt and deflation and dead not a great macro mix
So it's the good news. They're doing a more sensible way of trying to deliver the stimulus
The bad news is it's harder to calibrate the effect
Back in the old system if I was going to build a billion dollars worth of infrastructure
I was fairly sure that in the next call in GDP accounts. There would be a billion dollar boost via capex to your growth
if I'm trying to boost growth by giving some stimulus to the household sector and let's say I cut VI T tax rates or
Income tax rates. I'm not sure how the consumer responds and
Clearly the response to over the last couple of quarters has fallen short of what they're expecting. It's been exacerbated by trade tensions
My point is burning. However that okay if what I've done so far is not enough
They can dial it up in some stage you ghouls
Leading indicators of growth in China start to inflect
I think we're seeing you early signs of it now out now and so we all get this sense of cyclical
Improvement through the second half of this year, but what I'd highlight to investors is firstly it's going to be more modest
then certainly what we saw no 9/10, but even what we saw in 1516
But secondly because it's been directed more to the consumer than the corporate the spillover beneficiaries will be different
This will not be something that spills over. That's same to the industrial and commodity complex
There are other reasons that base metal prices. Come on commodity prices been rising. It's more gonna spill over to the consumer sector
Yeah, this is all cycle stuff
Take a step back
Chinese trend growth is slowing
It's slowing as I see in a fairly predictable fashion
It's remarkable. How closely
trend growth in China has followed the template set by Korea and Japan and
If it continues to follow that template and I've got no reason to think it won't think it may be worse
Because it's demographics are worse now than Korea and Japan's were at the same stage of its cycle
We'll probably be talking about 2 or 3 percent GDP growth as the new normal for China
In two or three years four years time
Whether they'll print that is another thing but I think that's going to be a closer approximation of their genuine and blind growth rate
Yeah, that's not too shabby. When you think the workforce is already shrinking. Yeah, so actually implies productivity growth economy wide of
Over two to three percent, which is pretty good
It's all we've had but it's pretty good
So we've got to get that we have to constantly recalibrate their own minds what is normal Chinese growth
And what's acceptable?
To us and policymakers now, of course, whatever that number is. There's a gap between what actually print
if you get any grip on the true underlying number, it's coming down quite sharply and
you think they start to weaponize the current see a bit more post the trade talks or
Look guys they do with it
I think what we've clearly seen over two or three e's is the start of what's going to be a structural
Grinding together of geopolitical stress points. I mean what we're seeing is clearly bigger than just trade
It's bigger than just Trump. It's bigger than just America and
I think the game-changer for a lot of people outside
China was Gigi ping
appointing himself Emperor for life
cracking down on
the green shoots of a liberal
political system
because the deal from the West always was well look will turned a blind eye to
Cheating and thieving on trade and other things and you're human right abuses on the basis that as you get richer
You get more like us
well, they'll stop looking like us and so to a certain extent the gloves are off and
I mean, there's an illustration of the fact that it's not just
Trumping it's not just the US. I mean look here in Australia
Which you know the caricature from most other parts of the world is that we are just an extension of China. I
Don't think we are but that's the view the caricature a lot of people have
they're taking the lead in in banning Huawei's participation the 5g Network e
Taking the lead in the crackdown on Chinese. We can call it Chinese. Sorry foreign political influence
Who would that be directed at? So I mean that's that shows that particularly I guess the five eyes
Are all concerned about what's been going on and
These tensions will continue
Well after mr. Trump's left the White House, I think and therefore the currency
Yes weaponizing the currency absolutely. Now look I think part of that where they caught weaponizing all
Arming it because I think one of the things that perhaps the US has been a little foolish on
Is the degree to which it's weaponized its own currency, and I'm not talking here so much about you know
The absolute level as a macroeconomic - but weaponizing it in quite specific financial
ways to bring down a Russian company to use its power as
the dollar as the world's reserve currency to achieve political aims and what you I think you're seeing is
Certainly a Russians certainly the Chinese but even to a lesser extent the Europeans going well
If they're going to use that in ways that breach the old understanding
Which is we have a global regulatory
infrastructure that we all basically abide by the rules and
You
Mister American have a privilege because we're using your currency as the benchmark, but ultimately you don't overstep the mark, okay?
Pick on your venezuela's if you want, but you don't pick on the big boys
Now that they've weaponized the dollar that effectively pick on the big boys. The big boys are going to go right
How do we get around this like no pact, correct?
I mean, I mean, you know part of it was the the the the the walking out of the arraigned Iranian deal
And threatening sanctions against European trading partners. What hold on
You say that's right. So I think
There's two elements these. Yes the Chinese
Can start to use whatever tools are available
If this really the tensions really start to escalate
But pirates being the rest the world also looking at the way the dollar has been used and the current administration and going
Well, that's the way this this is going
We need to build our own defenses or the chipping away at the petrodollar with a new futures contract. For example
Yes, you know D dominating trade in non dollar currencies or setting up. Yeah, effectively. What would be
SUVs dollar-based SVT SUVs that sit outside the US financial system
I we ever look
We've seen this before this gets back to the whole creation of the euro dollar market back in the 60s to escape
American regulation of the currency
So this is not without precedent, but I mean that was a commercial motivation
This is much
Political motivation interesting to see what it all ends up and the end game maybe but China is looking to become the global reserve currency
Clearly yes, potentially, but it's a 25 year trade
But potentially long I mean here's the interesting
Will you ever be accepted as the world's reserve currency if you don't have what we normally associate with it?
yeah, an open capital account law law force of a lottery, of course, you can always bully your way into
If you're the world's largest
purchaser of the say I and all just say well I'm gonna I'm gonna pay you in are in be
Okay, you can you can bully your way that far but that's quite different to having a global system with an R&D base
And this gets to the tension of where we are now if you think
China's
progression towards
a westernized liberal
Polity that's stalled then the forecast of it becoming the world's reserve currency
One of the most important I think also has to be pushed back because I think they may be incompatible
but there are other options and
Kosovars, well, I mean
To a more multipolar currency which comes back to what would happen if if the u.s
Does get very aggression aggressive unreasonably. So in the perception of other people in weaponizing its currency
And just as it shrinks as a share of global GDP
I mean it all points to capital controls all over the place at some point to me at some point
I mean the interesting thing would be say with with the adoption of mmt is if it was broadly done at the same time
There's only one thing paper currency goes down against
Gol-do. Yeah
But if you don't if you don't if someone tries to do it unilaterally
And then has capital controls
The fact that they think it's necessary to have capital controls problem means I pushed the accelerator way too hard
And that is where you start to get bad things happening
So long as they so long as they allow
Either an open capital account. So the market can explore its displeasure
By selling off the currency and or it's better to have them both if you kept central bank independence
So that they could lift rates if the fiscal authority got too loose
Then you have something that sort of semi workable I think not without its risks, but then other day we've got a current system
That's not been without its risks
You look back at the operation man
If your policy over the last thirty years and I don't think anybody's going to say that done a stellar job
I think we'll be happy to leave it there
Thank you very much indeed for your time, Joe. You're welcome. Look forward to seeing you on religion. Thank you. Thanks
