1 – More downside prices for Australia’s housing market
The Australian housing market is in the “bargain hunting” mode now. And that could add to downside losses.
If you recall, the FT did a piece on the falling market, citing people balking at paying high prices, that I took issue with. You need a catalyst for these things to happen. And once the market starts to fall, that’s when people balk at prices. The psychology of rising prices, where people scramble to buy before prices go even higher is turned on its head. As prices fall, people start waiting for prices to fall even further.
Here’s the South China Morning Post:
Rhi, who lives in the Illawarra region of New South Wales, south of Sydney, works in construction. She says she plans on biding her time and “snapping up” her first home when the market hits rock bottom.
“We are getting married in October and then we’ve got our honeymoon. This time next year is when we were hoping to get our first house. But if it keeps falling then we’ll hold off to see what happens.
“I’m hopeful. The banking royal commission seems to be tightening rules, and people with interest-only loans can’t refinance and potentially, that could compound on the baby boomers where they have to give up their investment properties.
“A lot of millennials don’t want investment properties, we just want a place to live without a landlord. It’s not a credit crunch, it’s a credit squeeze. It’s mainly investors who are being affected, your average homebuyer has seen a marginal impact on how much they can borrow
Why this matters: for people like me that saw the US housing bubble for what it was, this is a bad sign. When US prices broke, we saw exactly the same dynamics. And that made the downdraft bigger because it tool buyers out of the market who feared catching a falling knife in a leveraged investment. I believe we could be witnessing the popping of Australia’s housing bubble.
2 – Hong Kong stocks now in a bear market
Hong Kong is suffering along with emerging market shares. Since January, the stock market there has lost $976 billion in value. That ends an almost two-year bull run that saw shares climb 80%, with the Hang Seng up 36% in 2017.
Why this matters: Hong Kong has been here before, last in August 2015. That was right before the 80% surge. So it is conceivable that we see a full recovery here. But the Hong Kong market is a good proxy for both the anxiety over a trade war between the US and China and the turmoil hitting emerging markets. So it bears watching how this market fares. I don’t foresee a swift and marked recovery like 2015.
3 – Trade war between the US and China enters the next phase
At the weekend, US President Trump signalled he was ready to go all-in. On Friday, Trump told reporters on Air Force One that his administration will act on $200 billion in tariffs “very soon depending on what happens.” He went on to say “I hate to do this, but behind that there is another $267 billion ready to go on short notice if I want.”
Why this matters: Indications recently are on the Trump Administration finally making nice with allies like Mexico and eventually the EU and Canada to focus on China. Mexico is done. Trump’s people are negotiating around the clock to get a Canada deal done. And Trump himself has signalled a deal with South Korea is close.
On Friday, White House Director of the National Economic Council Larry Kudlow said on CNBC (and borrowing language from the second war in Iraq) that the US wants to build a “coalition of the willing” against China. Ostensibly, this would include the EU and Japan and other US allies. So, the US would have to squash disputes with those countries to get them onside. Kudlow also told CNBC, “the Chinese, you know, may find themselves more isolated if they don’t come into the global process.”
Deeper dive: Trade is an issue Trump feels comfortable on. Having jettisoned the free traders in his administration, he also feels emboldened to take an aggressive approach, looking to force China into concessions because of a perceived negotiating strength on his side. In his mind, he does not necessarily have to create a coalition to take the Chinese on. The US can ‘beat’ the Chinese through force of will.
When I read the South China Morning Post to glean what the mood in China is, I sense panic. There are multiple articles daily on the threat of tariffs. There are articles about Chinese financial regulators discussing ways to prevent a sudden escalation in the trade war with the United States and so-called “black swans” from crippling China’s financial markets. The Financial Stability and Development Committee (FSDC) met on Friday and released a statement specifically saying that China has to “prevent all kinds of ‘black swan’ events to maintain a healthy development of stock, bond and exchange rate markets”.
Given the backdrop, the question then is what the Chinese leaders do.
4 – Inflation now rising in China
Meanwhile inflation in China has become a problem. Last month, consumer price inflation rose to 2.3%, a six-month high. But this had nothing to do with trade or currencies. Instead it was caused by higher food prices due to bad weather and a recent outbreak of swine flu. Oil prices are also having an impact, with gasoline prices up 1.8% in the past year.
Why this matters: Starting a currency war seems less effective in an environment of rising domestic inflation. So China’s means of effective retaliation against the US are more limited to the degree it wants to shield its citizenry from economic hardship.
At the same time 2.3% inflation is not the end of the world. The Chinese could still use the currency card to retaliate. Moreover, producer prices, which had been rising 4.6% through July, slowed to 4.1% in August. There is room left for prices in China to come down.
5 – But what about Chinese stimulus? Important for EM too
The wild card in the currency war is stimulus because policy stimulus by the Chinese gives them the wherewithal to take retaliatory measures. It also will be critical for the emerging markets.
We’ve seen three major Chinese stimulus efforts since the Great Financial Crisis. China implemented two big programs — in 2011-12 and 2015-16 — even after a $583 billion package in 2009. Some credit the 2009 package for keeping demand afloat after the financial crisis. But more importantly for the EM universe, the 2015-16 stimulus rescued EM from a malaise that came on during the taper tantrum as the Fed signalled an end to quantitative easing.
Will the Chinese go this route yet again? And if they did, would these stimulus packages be enough to offset the tightening by the Fed?
6 – Brexit deal imminent?
In Europe, the big news of late is that a Brexit deal could be coming within two months. The EU’s chief negotiator Michel Barnier said it is realistic to expect a deal by early November.
But the real question is what kind of deal will we get. Moreover, given the internal wrangling inside the UK, it’s not even clear that the deal that Theresa May’s government reaches with the EU would be acceptable to her backbenchers, which now include former foreign secretary Boris Johnson, touted as someone who could try and overthrow May as PM.
Why this matters: I think the reporting on Brexit has been poor. When the UK first voted for Brexit in the 2016 referendum, I had a very clear idea what the issues were and what was at stake. Now, I feel like we have devolved into a day-by-day reporting of infighting and intrigue in the UK that obscures what the real issues are and how achievable a deal is.
A ‘black swan’ is more possible in those circumstances. I’m talking about a second EU referendum, a vote of no confidence in the government, a rescinding of Article 50 negotiations or a no-deal Brexit. Any of these outcomes is still conceivable to me. And nothing I see in the reporting of Brexit sheds any light on how likely or unlikely these outcomes are.
To me, a bad Brexit is a potential black swan event.
7 – Sweden’s turn to the right
Let me finish this daily with a note on Sweden. According to the Guardian, the Swedish “PM refuses calls to resign while second-placed Moderates rebuff overtures from far right”. We have an impasse. I see this as similar to what happened in the Netherlands in early 2017 when Geert Wilders PVV got the 2nd largest vote count. Wilders underperformed polls but was big enough that it made forming a coalition government hard given that the mainstream parties said they did not want to work with him.
Eventually the existing Dutch PM Rutte was able to form a coalition government and it’s business as usual in the Netherlands right now. Could the same thing happen in Sweden?
The Guardian has this quote:
“When the same party time and again increases, and the other parties stand still, then you have to listen to that part of the population that is voting for this party,” said the Sweden Democrats’ parliamentary leader, Mattias Karlsson. “It’s time to talk.”
But in the Netherlands, it didn’t happen.
Why this matters: Sweden is arguably a prime example of a country doing well in Western Europe. And yet the far right is gaining momentum. Unnoticed by the media, the left also gained ground in the election results. It was the mainstream parties that lost shares, including the Greens.
The fact that voters are rejecting the mainstream speaks to a sense of frustration, not with economic issues per se, but with governance. And immigration is at the center of it. I don’t see the immigration issue going away. Moreover, the Dutch gambit is risky because if the government is seen shunning a major political party and then fails to address issues that the electorate considers important, you could see a major backlash come the next elections – especially if we have an economic downturn.
In Sweden, I think we are going to see the same outcome we saw in the Netherlands. And we’ll just have to see how the voters digest this fact.