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Navigating a ‘phoney economy’

When money has no value, there’s a prevalence of ‘gift lenders,’ and the property market ‘pretends’ to rise, says Semper director Andrew Way.

There are several macro-economic factors at play that will have single or collective impacts on the financial services sector. Though we are in the middle of the Budget period, there are elephants in the economic landscape that loom large. Our observations lead us to believe the market is buying into falsehoods, perpetuated by leading commentators under the pretence there is buoyancy where there is not, and stability where there is overbearing weaknesses. 

These factors combined, provide a significant opportunity for a collusion of negative drivers in what we believe is currently a ‘phoney economy’. Here are seven areas that should be on your radar: 

1. Diminishing value of assets

The pervading value of FIAT currencies globally is in decline. The value of money domestically is falling fast, irrespective of its tradable value internationally. Quantitative Easing has drenched financial markets with an abundance of ‘free cash’ leading to an asset obesity that can only lead to economic ill-health.

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If money ceases to have value, it buys nothing. When a middle management executive cannot afford to buy a within a hour of their place of work, it suggests property prices are grossly inflated.

2. Low credit integrity

When credit markets are flush with cash, and there is an illusion of perpetual growth, and credit integrity suffers. Historically speaking, poor credit decisions go hand-in-hand with flush balance sheets. The abundance of capital burns a hole in a Treasurer’s pocket. But a reduction in credit integrity always leads to loss, and these losses are exacerbated when property prices fall. When this happens, it’s a downward spiral of poor loan write-offs and property sales - a race to the bottom. 

3. The rise of the ‘gift lenders'

With money being so cheap, there is a glut in emerging private lenders, many of whom do not understand the basic mechanics of lending or rate for risk benchmarking.

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What usually follows is losses from loans that fail with borrowers who cannot afford to service. Badly lent money stays ‘lent,’ becoming a gift that no-one benefits from.

4. The ‘pretender’ property market

Despite the rhetoric of a booming property market, it is a very slim number of properties that are setting this trend. Fear of missing out, an abundance of cheap loan capital and no investment alternatives all lead to a buyer-driven and thinly traded market that gives the illusion of stability. But not the entire market is represented. Prices are rising in select areas where there are more buyers than sellers. This is an illusion of growth. As simple as that.

Though the prudent point is to keep in mind that the figures you read about are distorted by skewed auction clearance numbers. 

5. The RBA: the ‘protective parent’

Property continues to bring more to the Australian GDP than mining. In fact: Australia’s entire financial institutions are so wedded to real property it has become the new Gold Standard requiring the RBA to adamantly protect it. But we are still witnessing a growing boom-bust cycle, with believers expecting the boom cycle to continue. It won’t.

We suspect the RBA will ask the major banks to lead an increased margin of separation from the cash rate in an attempt to cool this overheated market. And any increase in rate could precipitate a rapid turn in the property market.

6. The ‘sleeping bear’ is about to awaken

The world’s domestic production has slowed considerably. But Australia has had the resources to maintain growth and give the impression the economy can continue its current trend inside a COVID bubble. Certainly, the containment of COVID has benefited Australia as a net exporter. This must surely have aggravated China as it attempted to use economic coercion to silence its critics.

But a flood of cash to the market, combined with shortages from a reduction in global supply, must surely lead to inflation. And inflation at the top of an asset growth cycle can be disastrous. And if we think a recovery in economic supply lines will come to our rescue, we doubt it. What it will surely do in a world desperate to recover the losses incurred through COVID will be a rapid reduction in prices for all the raw materials and natural resources Australia has to sell. Let’s not forget the substantial supply chain issues. The current blockage of products for world markets coming from Southern China is many times worse than the blockage from the Suez Canal.

Any one of these factors alone can lead to instability, but many of them are likely to combine over the coming year.

7. Impending global inflation

The truth is the global economy is very, very precarious. If you pump money into a market long enough, eventually, it's got to have inflationary factors. We should therefore prepare for high inflation globally. It might not come for a year or so, but we could see a period of quite considerable inflation. And if the US market starts to become inflated, the rest of the world will become inflamed. 

We're in this completely unsustainable and phoney state of self-belief that everything is going to continue.

We encourage industry to keep across the broader macro-economic and political narrative to stay ahead of the game, as the ‘macro’ moulds the ‘micro.’

For the financial services industry, it will dictate the amount and type of finance available to whom. It will open up and close opportunities. And most importantly, it will shape consumer sentiment, which is arguably the most profound driver.

Navigating a ‘phoney economy’
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