Pete Wargent blogspot


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Friday, 15 November 2019

Below potential; could do (much) better

Below potential

A bit like my old school reports, the ABS released its State Accounts which showed the expected lacklustre growth in Gross State Product in FY 2019, well below potential.

Across the industries only healthcare and social assistance recorded any sort of meaningful growth, with a bit of a residual contribution from the death throes of the construction boom.

There are many different ways to look at trends in household income and disposable income.

The big picture is that the resources jurisdictions of Western Australia and the Northern Territory have been in what people these days seem to call an 'income recession'. 

Canberra incomes remained miles out in front on a per capita basis, as ever, with steady increases elsewhere.

The unemployment rate in WA has been steadily righting itself as some workers have returned interstate, and as mining drilling and exploration has picked up again.

Mortgage rates now falling

Interest payable on dwellings crept a little higher in FY 2019 as lenders have been able to charge higher mortgage rates on interest-only loans. 

However, since the election on May 18 interest rates have been cut thrice, and the interest rate differential for IO loans has also been snapping shut. 

Total interest payable on dwellings remained lower than 11 years earlier - despite the 4 million increase in the Aussie population - and will fall again in FY 2020 reflecting lower mortgage rates, accelerated repayment of debt, and a huge reduction in the stock of IO loans as a share of total mortgage debt.

The implied average mortgage rate payable was extremely low at under 3½ per cent, reflecting the rapid growth in loan products that give borrowers access to offset account facilities.

There's been some screwball reporting of RMBS arrears over the past five years or so, but the Reserve Bank's Debelle did well to put the true picture of mortgage arrears into context at a speech today in Sydney. 

One interesting point of note was the increase in longer term mortgage arrears in Western Australia, as lenders have adopted more lenient forbearance and foreclosure policies. 

Thursday, 14 November 2019

Unemployment rate rises to a 16-month high

Jobs boom is over

Not all that surprisingly, given the indicators, total Aussie employment fell by -19,000 in October 2019, driven by a decline in full-time employment.

The jobs boom is over in Sydney, as previously indicated by the LMIP, ABS, and Seek vacancies reports.

And Australia's annual employment growth has now slowed to just below 2 per cent (at 1.99 per cent).

The negative employment figures for October were driven by New South Wales, Queensland, and South Australia, with Victoria left as the last man standing in terms of solid employment growth. 

Unemployment rising

The participation rate ticked down a notch to 66.0 per cent, but the unemployment rate lifted anyway from 5.20 per cent in September to a 16-month high of 5.32 per cent.

The number of unemployed persons jumped from 709,000 to 726,100, and even looking at the trend it's clear than we're drifting further away from full employment (which might be as low as 500,000 to 550,000 unemployed persons? Or even fewer?). 

New South Wales has had a very low unemployment rate lately, but even with Aussie exports booming this hasn't been enough to lift wages growth much above 2 per cent, and now the unemployment rate is rising again. 

In Queensland the unemployment rate is far too high at 6½ per cent, and a number of other states are faring little better. 

The trend year-on-year change in monthly hours worked slowed to just +1.7 per cent, which is also too slow given the growth in the labour force. 

Finally, the underemployment rate increased from 8.3 per cent to 8.5 per cent, while the underutilisation rate increased to 13.8 per cent, which is the highest level in more than a year. 

The wrap

Full employment drifts ever further away, while the forward-looking indicators point to a further slowdown in hiring ahead.

Recent market pricing for interest rates has been a little baffling at times.

Given that full employment isn't even on the radar screen, and nor is the inflation target across the entire forecast period, a rate cut by February is deemed probable (though why wait for months when inflation is miles below target and unemployment is rising?).

Seek jobs ads down 8pc

Job ads sinking

Seek's job advertisement figures for October 2019 were negative year-on-year, in line with other job vacancies surveys.

Year-on-year ads were down -7.8 per cent.

The New South Wales jobs boom is finally over as construction slows, with ads down by -14.5 per cent over the year. 

Source: Seek

Analysis by Greg Jericho at The Guardian showed that full employment and wages growth might not happen until the unemployment rate hits 3½ per cent. 

Buckley's chance of that as unemployment looks more likely to rise further based on these numbers. 

The holy ratio of bear porn (5:1)

Gloomsday blogging

This week I wrote a short but cautionary blog post about a spike in construction insolvencies, which garnered more than 7,000 blog hits, has so far been viewed more than 3,650 times on LinkedIn, gathered me about 100 new Twitter followers, and was gleefully reposted across Reddit, PropertyChat, and goodness knows where else. 

This always happens, without fail.

It's the holy ratio of bear porn: bearish or negative articles always get about 5 times as many readers.

The comments around the interweb also tend to view such contrarian analysis as far more insightful and intelligent (whether it actually is or not). 

I don't pay to boost or amp up promotional posts on Facebook or elsewhere. 

After all, I've got more than enough work to keep me busy, and frankly I'd far rather have a niche readership of aspirational investors than thousands of crypto-fanatics or doomsday-prepping conspiracy theorists. 

I mainly write blogs and analysis because I enjoy it (try blogging for a week - you'll soon give it up if you don't enjoy the process of writing and sharing content). 

But it's clear as day to see how pessimism can sell if you want it to. 

Smart cookies like Martin North and others worked this out long ago - running stories on record mortgage stress since at least 2007 and 2008, all the way through to 2017, 2018, and 2019.

Doomsday predictions don't necessarily need to be accurate as long as you're preaching to a receptive choir. 

Try pointing out to people how low 90-plus day mortgage arrears actually are, on the other hand - well under 1 per cent - and you'll be met with a frightful volley of!

Don't miss the gloat

Psychologists know that we tend towards a negativity bias, and that evolution means we're hard-wired to respond to words like 'war' or 'murder' or 'cancer' or 'bombing' as a defence mechanism.

Unfortunately studies also show that even watching a few minutes of miserable news in the morning can cast a shadow over your entire day, which is tough when you're genuinely interested in world events such as the unrest and violence in Hong Kong. 

News media is now online and driven by a desperation for your clicks, so the bad news about the bad news is that we'll inevitably be fed ever more of it. 

According to my in-depth research on, erm, Google, psychologists seem to argue that people aren't so much driven by schadenfreude, although perhaps some have a ghoulish fascination with morbid events.

But when it comes it finance and the economy, I have to say my experience is that schadenfreude is a tremendous driver of traffic and interest.

When I post charts and information on Twitter absolutely nothing gets a more excited reaction than a rise in mortgage arrears; people just can't get enough of the idea that others are getting behind on their home loans!

It must be 20-odd years since I read it, but if my memory serves me correctly George Orwell observed in The Road to Wigan Pier that the indignity of 1930s unemployment became far more bearable if everyone else on your street was unemployed too. 

Most of us believe we're better than average, and so for many there's a curious comfort to be found in others struggling or falling on hard times. 

5:1 positive interactions

Perhaps not coincidentally psychologist John Gottman Ph.D. of the University of Washington found that a happy marriage consistently needs 5 times as many positive interactions as negative in order to thrive (big one-off events like birthdays or anniversaries don't cut it). 

Since our brains react more strongly to negative stimuli, I'd suggest you take a similar approach to your news and information intake. 

How exactly you do that, you'll have to work out for yourself.

Ditching Facebook and Instagram seems to be a popular choice.

Choosing your news and media sources (and when and how often you look at them) wisely is another important consideration.

From a business and investment perspective, I simply try to find people who've achieved what I want to achieve and watch and listen to them closely.

As a resident of London and then Sydney I decided 20 years ago that in growing countries with a floating currency then it makes more sense for me to constantly look for opportunities and to go long rather than short.

That doesn't mean it's always smart to be bullish - far from it - but by the same token being persistently negative means you'll likely miss opportunities. 

SQM releases housing forecasts

2020 forecasts

SQM released its 2020 Boom & Bust report, with its annual forecasts for housing markets.

The base case scenario sees a +7 to +11 per cent lift in 2020.

The scenarios are listed below:

The detailed report can be sourced at SQM Research here.

Greek gift

Get into the Greek!

The diamond dogs strategy of buying low pays off again :-)

The Greece stock market was once again crushed in 2018, dropping by almost 37 per cent as the economy appeared to be on the brink of catastrophe and investors were spooked out of the market. 

The market dogs strategy doesn't expend too much time and energy on working out how and why the market will recover, instead simply recognising when a market is very cheap and out of favour.

As it turns out the Greek economy is growing again and unemployment is continuing to fall.

As so often happens, buying some of the most hated markets has paid off handsomely this year as the bounce was both swift and dramatic in the first half of 2019.

Everyone out together; everyone back in together on the rebound.

You'll see that the same patterns repeat over and over again across both developed and emerging markets.

Of course, it's not easy to pick the exact bottom of a market, so drip-feeding money into the market helps to mitigate this risk.

So far this year the Greek stock market is up 42 per cent, so now it's time to take money off the table and move on to the next hated investment, constructing the portfolio as a series of bets in accordance with the principles of the Kelly criterion. 

Average returns are meaningless

There's an important point to note here, and it's this: Greek has been one of the the worst-performing stock markets in the world over the past 15 years, delivering negative returns. 

But by buying at the lows (e.g. at the end of 2012, when the Eurozone debt crisis crippled confidence) the annual returns can still be strong (e.g. up 53 per cent in 2013). 

Another of the other worst performing stock markets has been Turkey, delivering close to no real returns over 15 years, yet check out the annual returns in 2007 (up 75 per cent), 2009 (up 99 per cent), and 2013 (up 65 per cent).  

Trees don't grow to the sky

This dynamic is not unique to Greece or Turkey, or any country - or indeed, any sector or asset class - the ebbs and flows of markets continually bring indices in and out of favour.

The dogs strategy involves a staged entry into indexes when they are very cheap to protect your capital, and then taking money off the table when markets are no longer so hated and cheap.

Other important parts of the systematic strategy include diversifying the portfolio across a number of investments, portfolio rebalancing to force yourself to buy low and sell high, and maintaining a chosen allocation between cash and stocks. 

Using this strategy doesn't mean you can't be a passive investor as well, if that's what you want to do. 

But as you can see, it's a way to consistently grow your capital on a rolling basis, while reducing the risk of sharp portfolio drawdowns. 


My sixth book will be published in the first quarter of 2020, and discusses how you can manage your own money for financial independence. 

On and on... (everything is awesome!)

US stocks record

Tesla's (NASDAQ: TSLA) recent run has utterly crushed the shorts, with the share price more than doubling since June on an improved market reaction to recent releases, and folks are beginning to talk about possible record highs in 2020. 

More generally, US stocks have simply powered on and on, reaching new all-time highs yesterday.

If you ever watch networks like CNBC (I wouldn't recommend it) the mood has generally been jubilant, bordering on crowing.

While there's no single agreed upon measure for valuing markets, the overvaluation according to most metrics is bordering on deranged.

At the last count the Crestmont P/E is more than 125 per cent above its long term geometric average, or 3 standard deviations from the mean. 

Investing at those levels offers expected real future returns of somewhere close to nada - a bit like three 7-foot blokes coming into a room, and expecting the next few guys to be 7 feet tall as well. 

Unless the Harlem Globetrotters are in town, that ain't gonna happen. 

Meanwhile, Wazza has been building up his cash pile to unprecedented levels at US$ 128 billion.

Having some cash certainly seems like a smart move right now given how expensive stocks are.

But still it's been a tough time for fundies to demonstrate their worth, with most failing to keep up with total return indices. 

Wednesday, 13 November 2019

Wages growth decelerates

Down payment blues

Wage price growth was just +0.5 per cent in the September 2019 quarter, and a rather desperate +2.2 for the year, which represents a disappointing (if not exactly surprising) deceleration.

Year-on-year wage price growth was dragged along by public sector wages growth of +2.5 per cent.

But quarterly wage price growth in the private sector is now running even more slowly than it was at the end of 2018. 

The only state which looked at though it might have a positive effect on wage price growth with a tightening labour market in the private sector was Victoria.

But even this hopeful trend seems to have lost momentum now as construction hiring drops away.

At +2.8 per cent Victoria held onto the title of 'fastest' wage price growth. but overall the picture was very subdued, and now slowing. 

There's been some mean reversion for the resources states, with wages in Western Australia growing by just +1.6 per cent. 

Across the sectors the strongest annual wages price growth was in healthcare and social assistance at+3.2 per cent, and the slowest was in information media & telecommunications at +1.7 per cent.  

Wage price growth in both the retail and construction sectors was fairly dire, at just +1.9 per cent. 

If you dig deep and hard enough you can usually find something positive (or negative) to say.

And this quarter - with a bit of help from the base effect - private sector wages including bonuses increased by just shy of +3 per cent.

But overall the hope that a tightening labour market in Victoria would drive wages higher has faded, while New South Wales wage price growth of +2.2 per cent is anaemic. 

Prosperity and welfare

Productivity has fallen, and market measures of long-term inflation expectations have cratered, so a deceleration in wages growth probably shouldn't come as much of a surprise to markets.  

The Phillips Curve is shifting lower, and flattening - full employment is probably at a guess somewhere closer to 4 per cent based on international experience and through casually observing Australian statistics.

Yet there's still stacks of underutilisation and no apparent reason for this dynamic to improve. 

To be fair, let's see what tomorrow's labour force figures bring to the party, but with well over 700,000 unemployed and inflation below target the economy could be allowed to run faster than this. 

Tuesday, 12 November 2019

UK unemployment falls to 3.8pc

UK full employment

The UK unemployment rate fell to 3.8 per cent according to the July to September 2019 report, which is essentially as low as we've seen since 1975.

The employment rate was 76 per cent, which is also just a notch below the highest level we've ever seen over more than four decades. 

And look at those wages go:

Of course, the UK is about to nobble itself right in the ol' foot with the Brexit debacle, so the economy will now go through another lull (indeed growth is already plumbing the slowest levels in a decade). 

But it's interesting to note how the commitment to full employment has paid off in terms of rising incomes.  

Australia's wage price index or Q3 will be released on Wednesday, and the market median forecast is for wages growth of just 2.2 per cent. 

If we're lucky in might come in at 2.3 per cent.

Not unrelated: on November 26 Reserve Bank Governor Lowe will speak on unconventional policy options and some lessons from overseas. 

Podcasting: self-funding retirement through property


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Welcome back, Perth

Vacancy rates

Vacancy rates recorded minor 0.1 per cent monthly decreases in Sydney, Hobart, and Adelaide in October 2019, according to SQM Research.

The tightest markets are now Hobart (0.5 per cent) and Adelaide (0.8 per cent). 

It's getting pretty tight down there now in the South Australian capital, so we can expect rents to pop higher.  

You can click on the chart below to expand it, where the vacancy rates are plotted on a 6mMA basis, not seasonally adjusted:

Sydney's vacancy rate was a bit lower again in October -it will spike again over the Xmas break as it always does - but will begin to trend lower thereafter as the pipeline of new supply finally shrinks. 

Interestingly Perth recorded another significant drop in vacancies from 2.7 per cent to 2.4 per cent.

Source: SQM Research

Melbourne was flat at 2 per cent, and Brisbane was at 2.3 per cent (trending steadily down from 2.7 per cent a year earlier). 

Monday, 11 November 2019

Is the poop finally hitting the fan?

Insolvencies spike

This housing cycle isn't out of the woods yet - not by a long chalk - as more developers and construction firms continue to go bust.

This is the sort of thing we've been hearing a lot about around the traps, but now there are official statistics to confirm it. 

In Q3 construction insolvencies spiked to their highest level since the September 2013 quarter, according to the latest ASIC figures. 

There was a sharp quarterly increase in construction insolvencies in Victoria, from 107 to 190, as well as a further increase in New South Wales, and more than a 40 per cent jump in Queensland. 

Finance conditions often remains hellishly tight, and developers are increasingly facing challenges related to insurance, while for many apartment pre-sales have dried up. 

Construction insolvencies are now at multi-year highs in all three of the most populous states, and have increased sharply to a six-year high at the national level. 

You can click on the below image to expand the chart:

There appears to be a general complacency that Australia is 'home and hosed' now that housing prices are rising again, but complacency can so often be a dangerous frame of mind in finance and markets. 

It always seemed somehow unlikely that the biggest construction boom in Australia's history would end with a benign whimper, as the multiplier we benefited from on the way up grinds awkwardly into reverse.  

If anything the risk of a recession in 2020 appears to be rising, which is why it's been so galling to observe the casual acceptance of labour force slack and years of missing the inflation target. 

Someone needs to get this economy moving, or else risk facing the banking crisis that everyone warned about! 

Net immigration picks up

NOM to rise

There was election talk of reducing the permanent visa program into Australia, but in truth this has been more than offset by a surge in temporary visa issuance to a total of almost 2.2 million (up from just 1.6 million in 2012). 

A closer look at the 2019-20 Budget assumptions shows that net overseas migration is actually projected to increase to +271,300 in 2020, while remaining above the present levels in 2021 and 2022 as well.

Source: Federal Budget 2019/20

This is relevant to the absorption of new apartments, since it implies Aussie population growth running hot at about +400,000 per annum.

Yes, we're building more apartments through this cycle, but net long-term arrivals are also now running at close to double the long-run average since the 1970s. 

Today the ABS released the overseas arrivals and departures figures, which showed that net permanent and long-term arrivals did indeed increase to +299,870 over the year to September (up from +285,430 a year earlier).

The trend for short-term arrivals has pushed relentlessly higher over the past year, despite a recent blip in the number of visitors from China.

A factor which could cause immigration to be lower than expected might be if more international students than expected choose not to hang around after graduation. 

In saying that, there's been no decline in short-term education arrivals, which hit another record high over the year to September. 

With the Commonwealth Games sugar hit now having worn off for Queensland, the Sunshine State will need to target tourism with renewed vigour.

Indeed, more broadly visitors have increasingly been attracted to locations such as Tasmania and the ACT, so there's potentially some marketing work to be done by all of the major states. 

The annual number of short-term arrivals from Hong Kong has only pushed modestly higher, up +4 per cent over the year to September. 

But as the protests - and now shootings of protesters - continue, more expats are understandably likely to leave permanently.

Certainly more capital is being repatriated to Australia. 

Sunday, 10 November 2019

Loan sizes up 6pc since May

Mortgage sizes increase

The average mortgage size has increased by 6 per cent since the election according to the latest ABS figures. 

There are different ways to dice up these figures - between established and new dwellings, and so on - but looking at owner-occupier mortgages (excluding refinancing) confirms the average mortgage size in New South Wales rising to a record high.

In Victoria the average mortgage size is rising again, following a preceding slump. 

These trends suggest that the strongest markets right now are likely to be inner Sydney and Melbourne, in that order, with Brisbane now returning to steady price growth after a hiatus. 

In what appears to be a chronic case of conformation bias a number of permabear observers are clinging to a theory that the housing rebound is a hoax (loosely hung upon a cautionary comment made my mate Nerida Conisbee, Chief Economist at REA Group, a month or two ago).

Well, it's all happening!

Quite likely there's a good deal less bullish action going on out in suburbia, but inner Sydney and Melbourne will be breaking fresh highs imminently.

The conspiracy theorists may be well advised to take a closer look at the latest SOMP, which was telling.

The RBA further noted that although new housing loan flows are picking up solidly, there's been nothing of concern in the housing credit growth figures to date, especially since more households have taken advantage of record low mortgage rates to pay down debt.

In terms of risks for the economy, finance for new construction remains weak, and this could lead to problems down the track.