Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Thursday, 13 November 2014

What Goes Up...! (Wages Beatdown for Mining States)

Wages Stuck at Survey Low

Looking at how the long run quarterly wage index gently sweeps higher over time, you might think that there is little value to be found in looking at wages growth data. 

The chart goes up a bit quicker at times, then a bit slower again at others, with public and private sector hourly rates of pay appearing to dovetail rather tidily over time.

Au contraire, as they say in France, there is much to be learned from looking more closely at wages data!

While we don't have the space to drill down in great detail here (in actual fact we do, rather it's just a sure-fire route to a dwindling blog readership), headline data tends to obscure what is happening at the industry and state level, as well as failing to take account of increases in the cost of living.

In the event headline wages growth for the September quarter as reported by the ABS came in bang on expectations at a seasonally adjusted 0.6 percent for the quarter and 2.6 percent for the past year. 

Real Incomes Shock

Annual wages growth of 2.6 percent per annum is a soft result and represents the low tide watermark for the history of this survey.

Indeed, the actual readings of 0.589 percent for the quarter and 2.577 percent over the past year (h/t to the eagle-eyed David Scutt), suggest that wages are doing little more than trading water in real terms.

Moreover, with inherent slack in the labour market and in keeping with the French theme, wages appear likely to progress at a snail's pace over the next couple of years as the impact of our plummeting terms of trade wash their way through the economy.

State Versus State - Mining State and Public Sector Pain?

One of the themes of this blog, and indeed my personal investing over the longer term, has been an inherent bias towards industrials and financials stocks (rather than resources sector equivalents) and capital city property, particularly in Sydney and London, which has been precisely the opposite of what has been recommended by perhaps a majority of property experts.

Back to wages growth, here is what has happened to the wage indices by state over 1, 5 and 10 years respectively.

Over the last decade, some mining-focused states have seen wages pumped up to the max, with the mining construction boom holding up for much longer many of us anticipated. 

I exited the resources industry myself in 2010 as construction gave way to production, potentially foregoing a decent number of ZEPOs in the process I might add! 

Partly that's because I felt that commodity prices and the outlook would decline, but in truth it was mostly because analysing monthly production data for ASX releases and squeezing operation costs until the end of time seemed relatively speaking rather dull.

Yet in the event, mining construction activity in the economy has remained elevated for a long, long time.

Mining Construction Boom to Unwind

I've copied below an important graphic from our chart pack which helps to explain what I'm gradually driving at here. The mining construction boom really took off about a decade ago and as commodity prices spiralled northwards the boom just kept on keeping on...

And hey presto, wages growth went surging higher too, although you may not have felt that impact if you didn't work in the resources sector. But look again above at which phase the mining boom is hitting now. 

We are transitioning into the production phase of the boom, certain commodity prices have been in near freefall and the construction activity is going to unravel imminently, which will put a heavy drag on the mining state economies, although other non-mining capex should in theory rise to some extent in response to low interest rates.

Guess what happens to mining wages next?

Mining Sector Wages Growth Grinds to a Halt

The wages data showed today that mining wages growth for the September quarter were the weakest across any sector. 

Interestingly, despite the boom in dwelling construction, construction wages fared only a little better. 

Why? That's due to slack in that sector of the market and an excess of engineers and construction workers who have recently completed mining projects. I know of few of them myself! They've been earning big dollars and completion bonuses on mining projects, but now they are seeking new roles and fresh challenges.

People may think I have some kind of a vendetta here against some of the mining-focuses states, but this is not at all the case. After all, I was previous employed in the resources sector myself, largely in South Australia, and am also a former resident of Darwin.

Rather, as someone who worked as a Group FC in the mining industry through the construction boom I inevitably saw some of the booming wages at first hand and now appreciate that we must expect the downside drag on mining wages growth. 

While the wage price index has held up reasonably well in New South Wales, which in our opinion is the most robust state economy, elsewhere the picture is less than rosy.

The trend is very sharply down in Western Australia after periods of rampant growth through the boom years, while wages growth is also trending sharply down in South Australia and Queensland.

Meanwhile budget cuts to the public sector have shifted labour market expectations adversely in Canberra and wages growth in the ACT has dived to just 1.7 percent year-on-year, well behind inflation and a statistically significant wages decline in real terms.

The chart tells its own story. The mining construction boom brought wages growth, but now...

Good Times Don't Last

I'm not a bad case study myself as an example of why the mining boom wages growth will now result in slowing wages.

Formerly employed in Financial Services in professional practice (though with a resources focus), I transitioned into the mining industry as the exciting, and to be blunt, more lucrative, construction phase of the boom really began to hit its straps.

It was an exciting time to work in mining: M&A activity was soaring, historically high prices of copper and gold allowed companies like ours to explore valuable deposits anywhere from Sumba to West Papua to Madagascar, while construction projects can bring industry participants healthy completion bonuses.

Working in finance, unavoidably, I also witnessed or heard about wages excesses and cost overruns.

At various times through this tumultuous decade for commodity prices some people in the industry's small cap ventures at the bottom end of town were getting paid to do nothing at all as projects were delayed or mothballed!

During a resources project construction progress can feel as though it is both costly and painfully slow, partly for very good reasons, including health and safety which today must always remain paramount. "You can't take a leak without filling out a form" as the engineers sometimes lament.

When the good times are rolling, people think that they will ever be thus, but this never proves to be the case and nor will it now that the construction phase is dwindling and many of us have long since moved on to pastures new.

The states which benefited from booming mining wages will now feel the impact on the way down too, while mining town properties will be among the hardest hit of all.

Meanwhile as production ramps us commodity prices have been sliding. It took a little longer than many of us expected but the mining construction downturn is now well underway and there will be some fallout.