Tuesday, 01 October, 2019
Terry McCrann: RBA’s rate cut is weird and troubling
;widows: 2;-webkit-text-stroke-width: 0px;text-decoration-style: initial;text-decoration-color: initial;word-spacing:0px”>Now it’s at 0.75 per cent and headed to a really weirder and — what’s a stronger word than a rather inadequately sounding “more troubling?” — 0.5 per cent.
But the really, really — ultra, extreme? — weird and troubling point is that this is on the assumption that the world economy keeps ticking over in reasonable shape.
The RBA cut and will cut again into its own internal expectations that economic growth is picking up.
It marked a, true, “gentle” turning point in the first half of the year.
It’s expecting growth in the economy to keep rising smoothly and the jobless rate to — true, ever so slowly — come down.
This is crazy.
Cutting rates and especially cutting rates towards zero would surely only happen if the economy was sliding into at least a serious recession or even worse, a depression 1930s-style?
That leads on to the “other side of troubling”.
What if it’s wrong?
What if the global economy is heading towards if not necessarily over the cliff?
Now while that would validate it cutting pre-emptively if unknowingly into the global downturn; it would also mean it would have used up all its rate ammunition.
Back in 2008 it started from 7.25 per cent.
Further, it has cut and will cut again knowing full well that the banks won’t and indeed really can’t pass on the cuts in full — to borrowers and depositors.
Not that that’s much joy for depositors already earning zip or close enough to.
Even more confusingly — and troublingly — it is also cutting with the full realisation that it will boost the reheating property market in Melbourne and Sydney.
At least it’s looking for a bit of “trickle down” from second hand property prices to actual new property construction in the real economy.
You want crazy, just think about that?
We could have the “perfect” clustermuck of a booming property market and an economy heading into the toilet?
That alone should give all you investors out there — either seizing the ultra-low borrowing rates to borrow and invest big, or buying shares rendered “cheap” in comparison — some, well, pause.
So why’s it doing it?
Essentially, because it believes it has no choice.
And no choice on two levels.
First, that the local economy is underperforming — the inflation rate’s too low and increasingly in its motivation that the jobless rate is too high.
And secondly, because “everyone else” has already done it.
The world is awash in zero and even negative interest rates.
Only the US is a bit of a standout — with an official rate now well over double the RBA’s; and I might add appropriately so.
Of course, if President Trump had his way the US rate would be down as low as ours and indeed lower.
In truth the RBA does not expect the rate cuts to send business activity rocketing. The “benefit” and “it had no choice” is really aimed via the exchange rate.
The RBA is focused on delivering a boost to the economy by keeping the Aussie dollar in the mid-60 cent range against the US dollar.
That’s where it sees the stimulus coming into the economy; although it is obviously banking on a revival in construction; and RBA governor Philip Lowe has been rather publicly pleading with his boss, treasurer Josh Frydenberg, to embrace a big infrastructure spend.
This is really, really dangerous territory for investors.
Globally zero rates and money-printing have sent global share markets and especially Wall St to very high levels.
The Dow is nearly double its pre-GFC high while we have barely got back to our pre-GFC high.
Lowe has now joined Australia to the easy money party, although in our case it plays out more in the property market than the share market.
It just cannot last.
Either rates stay around zero because the economy goes south rather than picks up — and/or the world economy goes over the cliff or we get another version of the GFC.
Or the loose money and “lowe” rates “work” — the economy and inflation pick up pace and rates start to go back to normal. That is to say up — potentially sharply.
As an investor, you do not want to be the one left holding that parcel.
There’s also a far more fundamental question over all this.
Are policymakers bringing a conventional analysis and a convention policy response to dynamics that are structurally and secularly different to anything we’ve had before.
I’m talking about the “disruptions’’ of the internet, robotisation, the 24/7 wired world.
And the spectacularly unique dynamic of China — it’s been great, it might now be ending.
It’s always the case that monetary policy can be weak and even ineffective when the economy is sluggish or in recession.
It’s said to be like “pushing on a string”.
You can haul in a boom by sharply lifting rates; but cutting them might not work to encourage shell-shocked businesses or investors to borrow and spend.
Since the GFC it looks like this has got even dramatically more the case.
Despite rates being cut to zero and kept there for years and the central banks in Europe, the US and Japan printing trillions of dollars of money the economies — except the US — have remained sluggish.
We’ve now joined everyone else.
It’s like we are all holding hands and jumping into the unknown.