Are we bullish or bearish for 2023?

Adam: [00:00:25] Hello and welcome to Comedian versus Economist. Our final show for the year. We demystify the world of money and help you get a handle on the bigger picture. My name is Adam and we're joined, as always, by my little older brother and real life economist, Thomas. Hi, Thomas. 

Thomas: [00:00:40] Yeah. Good. Adam, how you going?

Adam: [00:00:41] Okay. I went to Melbourne over the weekend. Had a great time. Ate lot, actually. Anna and I went there and I think we just aways. You mentioned it so much. I had to pay for excess baggage on the flight home just to get my guts on the plane. But I did get home only to discover that I now have COVID as well. So, Thomas, you have to provide all of the expert commentary today and analysis. I hope you're up for that. I'm sorry, but you're going to have to bring it today. 

Thomas: [00:01:19] Yeah, well, big clown shoes to finish it. I'll do my best. 

Adam: [00:01:24] It is. It is our final show for the year I mentioned. That is our final show. I just want to thank everyone out there for tuning in throughout 2022. We will be back again in 2023 and we hope you'll join us again for what should be another massive year in economics and finance and everything. But. But I did want to get this out at the start and not leave it till the end. So I want to say a big thank you to the Equity Mates crew Bryce, Alec, Darcy, Emily, Alf, Simon. And last but certainly not least, Sascha, who produces the show every week, genuinely couldn't do the show without the support of the whole Equity Mates media gang. Much appreciated. We hope that you guys out there enjoy the show and yeah, hopefully you support them and all the podcasts as well. But Thomas on with the final show for the year and a massive show coming up as we end the year. I thought it would be good to take stock of where we're at. We all enjoyed the housing trip. Now we're asking when will the come down? And we'll take a look at next year. We know we're going hunting. We're just not sure if it's for bulls or bears. But first, it wouldn't be CVE without diving into GDP one last time. Thomas, go deep today. What have you got? 

Speaker 1: [00:02:38] It's a bit like it here. 

Adam: [00:02:40] Doesn't look good. You said you're going to have all the work show and nothing. 

Thomas: [00:02:45] And that is an it was an interesting number. Interesting. Now we've got 6.6% in the quarter, 5.9% year on year. 5.9 is big, but it sort of it's it comes week after the lockdowns in quarter three, 2021. And that was a big negative. So sort of that bouncing back is that strong, strong number for the annualised rate. So the annual growth rate. So if you take that 0.6% in the quarter and Annualise that, you've got 2.4%. So that's the sort of the pace. If you even if we kept this up for the next three quarters, that's what we'd get. And that's that's okay. That's not amazing. But it's okay, you know, all things considered. 

Adam: [00:03:24] So is the economy in good health, can we say. 

Thomas: [00:03:27] For the moment? For the moment, I think it's doing okay. It's doing pretty well. I mean, the sort of the thing to watch here is that it's largely driven by consumption. So without consumption, household consumption was up 1.1% in the quarter. You should take that away. You there's almost nothing else going on. Everything else sort of cancels each other out and you've just sort of got flat growth. 

Adam: [00:03:50] Hang on. What do you mean, household consumption? Just things we buy for our house. 

Thomas: [00:03:55] No household. So consumption by households. Yeah, that's just any consumer spending in any retail. 

Adam: [00:04:01] Retail as opposed to business investment. 

Thomas: [00:04:04] Okay. Yeah. Or exports. Exports imports. 

Adam: [00:04:07] To houses hadn't become sentient and started ordering things for themselves or just people that lived in houses bought a lot of things for themselves this year. 

Thomas: [00:04:20] Yes. As in end in household consumption, basically in services. So more than half of the growth in this quarter was from hospitality and transport. Right. So yeah, bouncing back in the services sector. 

Adam: [00:04:32] Did something myself last weekend, flew to Melbourne, stayed in a state and I know it's worked out really well too. 

Thomas: [00:04:41] So going forward we know the households are probably going to start reining spending in a bit, which is interesting that that hasn't happened yet. So interest rates have gone up, real disposable income is down, it's down 4.1% over the year. Now is with inflation and wages not keeping pace with inflation and mortgage repayments going up. So that's going down. So they should have less money. So the savings ratio, we talked a lot about this through COVID, so the savings ratio is now down, down to 7% in aggregate, up to a peak of 22% in the third quarter of 2020. 

Adam: [00:05:18] Is that how much of your wage you're putting away for saving? 

Thomas: [00:05:22] Yeah. So that boosts. And then. And then we started talking about the savings warchest that was going to support consumption or investment going forward. That's sort of now normalised. It hasn't been, it hasn't, we haven't seen a pay. We haven't seen a payback. So we haven't gone into negative savings because people say, well, I've saved too much. Now they just sort of gone back to saving what they used to save before the pandemic. 

Adam: [00:05:45] Dare I say we might have sensationalised that a bit by calling it a war chest. Then if it's if it's lasted, what, a month and a half. Then imagine kings and queens of ancient Europe With their war chests full. With gold and silver expected at the last of a month and a half if they go lie surrounded by an enemy. It's like when we are good people, we are fighting for at least another month. 

Thomas: [00:06:16] No, but we've had 300. But, you know, we got another rate hike last week. We've had 300 basis points in eight months. Mortgage payments going up. So far it hasn't hit consumption. Consumption is still driving the entire economy. You know, the business sentiment has turned down. There's other softer signs in the economy, but so far, consumption is holding up. And I think that's probably due to the war chest. Right. But that's, I think, must be starting to we're starting to eat into that now. But how long that lasts is hard to say.

Adam: [00:06:47] We're going have to ride this wedge once the war chest runs out. So any other any other standouts?

Thomas: [00:06:55] The other thing that jumped out for me is what happened with the net exports. And we covered this last week, we're talking about the price cap on gas and coal that got announced on Friday. So that's now got a price cap come in of $12 a gigajoule for gas compared to a futures price of about $30 now. And coal's capped at $125 a ton versus about 400 now. So that should have some impact. There's a lot of detail to be worked out, but that should that should sort of be working. But what was interesting in the GDP numbers is you get these export and import data. And what we've got is we've got near record terms of trade. So the prices we're getting for our exports are the best I've ever been. Almost we've got a $3.2 billion trade surplus, so we're exporting a lot more than we're importing. But Australia's net primary income has hit a record deficit of $33.2 billion. And what's happening is Australia's net foreign income outflow has exploded to 5.6% of GDP. So the basic story here is that the mining companies are making a lot of money, but they're largely foreign owned. So you look at their share ownership, it's like BlackRock and all these big foreign funds and all that money going back offshore. So even though we're trading, you know, exporting heaps, the money we're making from that is just going offshore. And we've got a net foreign income outflow of 6% of GDP almost, which is massive. Wow. So even though we have these wartime profits and the mining companies are making blood money hand over fist with Australia, doesn't benefit from that at all. It just goes to foreign shareholders. [00:08:42][107.4]

Adam: [00:08:43] It's really disappointing. [00:08:44][0.8]

Thomas: [00:08:45] Yeah. So I think it's worth remembering that the mining industry has said they're going to go really hard against this, they're going to run an ad campaign. So when you see ads on the TV talking about how it's going to put sponsorship of junior sport at risk, the price cap, just remember that all this blood money is just going overseas and Australia doesn't benefit from it. 

Adam: [00:09:05] Unless the overseas conglomerates are also interested in our junior sport programme. All right, Thomas, we can look at housing now. And where is the housing market right now as we end the year. 

Thomas: [00:09:19] Yeah, it still depends. What you want to call it is still moderating, still consolidating. It's another term for when you lose. 

Adam: [00:09:27] Prices are falling, failing.

Thomas: [00:09:29] So yeah, not down 1% in November. The latest data we're seeing so we're now down 7.6% in seven months and that's the fastest fall of that size on record. And we're getting close towards I mean, the interesting thing about property is it doesn't when it falls, it doesn't tend to fall that far. So in 82, 83, it fell 8.7%. So we're not far off that. The biggest fall on record was 2017 to 19, where it fell 10.7%. So we're getting close to this level.

Adam: [00:10:01] Was that 82? Was that around the same time we had runaway inflation as well? 

Thomas: [00:10:07] there was a recession around?

Adam: [00:10:08] There was a recession. 

Thomas: [00:10:09] Yeah. Yeah. On the back of high inflation in the seventies. But now. Right. 

Adam: [00:10:14] The recession we had to have that one. 

Thomas: [00:10:16] No. Again. Good. Just keep throwing. 

Adam: [00:10:21] Throw in things you heard on the news. Around you land one of them. 

Thomas: [00:10:28] Right. That was a nineties recession. So prices tend not to fall that far, having given up 7.6% after going up like around 30%, you know, so people saying us the biggest one is the fastest fall on record. It's like, yeah, it's like barely statistical noise in the scheme of things. 

Adam: [00:10:48] Was it also the fastest rise on record when it like earlier in the year or was it last year when everything house prices went through the roof? Was that also one of the fastest rises? 

Thomas: [00:10:58] I'd have to research that, but I think that's probably right. I think I think it's probably the case. 

Adam: [00:11:06] Right. Yeah. So we're not, we're not in a bad place then really where we're doing all right. 

Thomas: [00:11:10] No. Unless you bought in 2021, unless you stretch yourself to buy in 2021 and then you know, you prices have fallen and your mortgage repayments have exploded, you probably have negative equity because. 

Adam: [00:11:26] That's the double whammy. You know this, right? Like the interest rates are going up and house prices and house valuations are falling. 

Thomas: [00:11:36] You're, you're a bit stuck like you can't. So without losing a lot of you. You can't. So you struggle to make your payments. Yeah. It's a bit of a bind but it's, but it's a relatively small proportion of the. Market like total housing stocks owned by people in negative equity now. So yeah. 

Adam: [00:11:56] Are they Going to keep going down priced though like there. 

Thomas: [00:11:59] Seems to be it seems to be the general consensus you would expect. Like I think I think we'll I expect will get past that 10% record well in 19. And we talk about the lag. So CBA's chief executive Matt Coleman came out the other day and he said that so far CBA has only passed on about half of the rate rises delivered by the RBA between May and November. Really? And yeah. And then by March 2023, only 70% of the increase will have passed through.

Adam: [00:12:34] How was that work? Because I thought the banks were all just pretty much passing it on straight away. 

Adam: [00:12:38] Unless it was a late term deposit, in which case they were holding off flat rates for a while. 

Thomas: [00:12:42] I don't know. I guess it's probably the mortgage mix. 

Adam: [00:12:45] Like the fixed versus variable story. 

Thomas: [00:12:47] Yeah, yeah, that, that. But also like there's, you know, CBA would have like 100 different mortgage products and. Right. And the people move around between them and.

Adam: [00:12:55] Honeymoon rates and things like that. 

Thomas: [00:12:56] Yeah, I guess that's right. Yeah. And to be above the fixed rate things is a big story to say.

Adam: [00:13:02] I guess I have some expert analysis here. You care for the 

Thomas: [00:13:08] Thanks for the Analysis slash anecdotes. 

Adam: [00:13:12] Anecdotes and guesses.

Thomas: [00:13:15] About 35% of outstanding mortgage credit is on fixed term rates and about two thirds of those are due to expire by the end of 2023. So still, a lot of people who fix rates at super cheap rates who haven't seen that go up yet. Right. And when they do, sometimes I also someone say that in September 2023, if you're coming off your fixed rates, then your mortgage repayments are going to go up by 70%. Poof. Yeah, it's a big, big jump. So the real question we've got to about 35% of the mortgage market is going to be doing something like that. So the real question is, are our households prepared for that? The question is sort of like with the consumption stories, are they cutting back spending now because they know they're going to that repayments are going to go up or are they just sort of ignoring it and just planning to deal with that when it comes, which would be interesting. And then and then if they do that, then they could potentially find themselves in trouble, you know, be a 70% jump in your mortgage repayments. That's a big jump. 

Adam: [00:14:14] On the plus side though, as they all hear the news and everyone's like, Oh.Then this wage is going to go up. I before we get to a break, I did get a couple of listener emails this week. Thomas did. 

Thomas: [00:14:27] Sorry, not me.

Adam: [00:14:31] Sure. Survivors, in fact, it's one in particular. I'm sure it was pretty much directly to you but Cameron cve@equitymates.com Who made us feel both good by saying and yet I tell him I have a question where does the extra money go that the RBA the RBA charges lenders 

Thomas: [00:14:48] I don't think they do charge lenders. 

Adam: [00:14:50] They're going round it goes no way and no. 

Thomas: [00:14:53] Yeah not and that's not a I can't think of a context. 

Adam: [00:14:56] The RBA makes money they don't they, they lend money to the banks don't they. 

Thomas: [00:15:01] No, no, no, no, no, no. Well I mean they did there was the term funding facility through covered where they were lending money at cheap rates. But that was a particular that was a liquidity run. A measure. It wasn't. That's not normal business practise. No, and they do. But they do make money. They say, you know, for example, they stabilise the currency. So they buy when it gets too low and they sell it when it gets too high. So they're buying low. Selling high. So they're making money there. Yeah. And then with the printing money and they buy bonds, the bond, you know, through the money printing through COVID. So they would print the money, just give themselves the money, go buy bonds from the government. The government would then pay them a dividend on the bonds, pay them a return on the bonds. And so they were making money that way on the money they were investing the money they just printed and making a return. 

Adam: [00:15:49] Sounds like a sweet gig. But then it got better, right? So then because they're. 

Thomas: [00:15:53] They're a government agency, any money they make just goes back to the government. 

Adam: [00:15:59] So the government was paying them interest on the bonds? Yeah, the government was taking that and then giving it back to the back to the government. 

Adam: [00:16:08] Right. Looking for a good Christmas party this year? Can I suggest the RBA Christmas party. They Are the best government slush funds going around. All right. Why don't we take a break here, grab a quick word from this week's sponsor and be back with more comedian versus economist right after this. Welcome back to comedian versus economist. You can, of course, send us an email at cve@equitymates.com Or get us on social media on Facebook and Instagram. I should call out to that. It seems like a long time ago now, but we did do like economics one one series for season one of comedian versus economist. So if you're new to the show, if you haven't heard that, then I'm sure there's some some good learnings there. So maybe get your eyes around that over the Christmas break. But Thomas talking about next year and 2023. I get a bit confused because I hear lots of commentary. Some people say it's the end of the world. You should pull all your money out of your stocks because there's a big recession coming. Other people I hear saying, look, now's the best time to be buying and getting into the market and that kind of thing. So everyone can't be right. So I thought we'd just go through maybe some of the big the big themes, economic themes and get your take on the bull and the bear case for 2023. So starting with inflation, was the bull case for inflation, first of all.

Thomas: [00:17:30] Yeah. So a reference point is what like whether with the share markets going in 2023 with the bullish or bearish? And so in that with inflation like I think the bullish case is that inflation tends to be a lagging indicator. And all of the sort of the the forward indicators we have of inflation seem to have peaked. So we talked a bit about that last week. Like all the supply chain bottlenecks, we had the the bottle shop index that's that's rolled over. And so that should I should see inflation start to ease off in the near future. And so that would be a bullish case. I'd probably be my central guess as well.

Adam: [00:18:08] And with inflation easing off, that will mean interest rates will will flatten or maybe drop. 

Thomas: [00:18:14] Yet potentially. Yeah. Yeah, that should be. That's near. That's also tied into the bull. The bull case. Yeah. The bit in the bear case is that, you know, we have had sort of like these sort of local peaks in inflation already this year with a few places where it felt like we were peaking and then it didn't turn out. Wages tended, so prices tended to be stickier than we imagined. So that's that's of the bearish case is that it won't that it won't come back quickly or if it starts to, it might peak then hold at a higher than target for quite a while, potentially through the full year. So that would be your bear you bear case scenario.

Adam: [00:18:50] What's the outlook for GDP? 

Thomas: [00:18:52] I think the bull case is that is the soft landing that GDP slows, but you don't get a recession. We walk that narrow path and then the economy cools down and prices cool down. But we don't, we don't tank GDP and things are okay. 

Adam: [00:19:10] I heard it referred to as the Goldilocks scenario, which is not too hot, not too cold. Let me just run. Yeah. Yeah. I didn't know we needed another analogy for it. I think Soft Landing was getting us by. The narrow path of this narrow path is the landing. Yeah, that leads to Goldilocks as. Yes. Well, there's three bears in there. You know, in that new market. 

Thomas: [00:19:36] So the bear case on this, on that on growth is that we don't nail that soft landing and things tank particularly like you look at Australia like it's it's consumption driven consumer sentiment data is terrible right now like it's worse than it was when COVID first hit and we were potentially looking at the end of the world. Consumers are more pessimistic now than they were then. Really? Yeah. Yeah. It's pretty weird, which is because they're seeing rates go up, the feeling that pain directly and they don't like it. Right. But so far, even though, you know. Right. Pain is there and consumption sentiment has tanked, we haven't seen falls and consumption yet, even though consumption is the single driver of the economy right now. That seems like quite a fragile scenario and could fall over pretty, pretty easily. It's not hard to see that that story falling over. Yeah. And we don't. Yeah. And we find ourselves in recession in and in a global recession as well. Like a synchronised global recession. 

Adam: [00:20:36] Yeah, that's bad. And we have one of those before. 

Thomas: [00:20:38] Or be a while meanwhile. Yeah. I mean. Yeah, I mean just one COVID covered obviously. 

Adam: [00:20:44] But yeah. But before that, like that was kind of what kind of wasn't really a recession wasn't covered. Like it was like a forced shutdown of everything. It's kind. 

Thomas: [00:20:53] Of not. Yeah. Yeah. Sort of a different story. . 

Adam: [00:20:57] so you gave me the list. So you've got monetary policy on the list. I really never know what that question may do. What are we talking about with monetary policy?

Thomas: [00:21:09] Oh, that's interest rates. Oh, that's interest rates and perfect. Quantitative easing. Quantitative tightening. Quantitative easing. 

Thomas: [00:21:17] now that's good. You've learnt a lot this year. 

Adam: [00:21:22] When you talk about interest rates every week. 

Thomas: [00:21:25] So on the interest rate frontier like. The bull case is that inflation has peaked and the central banks will pause pretty quickly, you know, potentially. Look, I think there's a good chance that the RBA will pause in February when when they meet next year they'll be willing to sort of, you know, at least take a month off. And if some of the data softens, then that might be a turn to a longer term pause. Markets are still pricing in a higher terminal rate, but, you know, it's possible. And then the other bullish case is that as the economy starts to soften, rate cuts start coming in mid-year. That would be the uber bullish case. But that is enough is enough to build a bullish case. Just on the idea that we've reached, we're close to the terminal and there's no more rate hikes from here. 

Adam: [00:22:16] How much of it will be like how much in Australia will it be dictated by what happens in the rest of the world? Like if America keeps hiking rates and keeps, you know, inflation keeps getting out of control and the same in Europe then does Australia kind of naturally follow suit or are we kind of doing our own thing? 

Thomas: [00:22:36] I think would we largely do our own thing but are definitely influenced by, you know, by what's going on. It depends on what's happening with the currency. That's sort of where the big impact is felt. So there's if you create a large interest rate differential, then if Aussie debt's paid more than US debt or vice versa, then people demand more Aussie dollar dollars to buy those assets so it can influence the exchange rate. That could also be a good thing as well. So it's yeah, we don't, we don't just walk in lockstep, but we are definitely influenced by what happens globally. Yeah. Just, just we'll just be on the bear case, the bear case is just the opposite that we're not done.

Adam: [00:23:15] It's like a cop out. Could we just say that for every one of these we have to have a bullet in if we can just go through the bull case. And at the end of the book, as we say in the bad is just the opposite of what we did. 

Thomas: [00:23:27] Well, there's this new onset of the tariffs, you know, typically, I mean typically in the US because, you know, people have been interpreting Jerome Pound's comments as saying that the poor, the pause is there. And he's saying like, now we're just going to like have less aggressive rate hikes, but there's still more rate hikes to come. Yeah, particularly if inflation is sticky, then we could get more out of the central banks next year. So that should be a case. Yeah. On valuations, sort of like as we as we go as the economy softens that that impacts corporate earnings, which then should theoretically influence the outlook for share prices. So so the question is, has that has the the correction we've seen in share prices dealt with, the correction that we're like is the downgrading to the revenue outlook. And so earnings in America have been revised down by 5% already. And so the bull case is saying like, yeah, that those earnings have been revised down by 3%. The average drawdown in in a bear market outside of recessions is 27%. We've already seen that. Therefore we're done. The market should turn from here and we should be okay. This is all assuming like the other bull case scenario is holding is More rate hikes and no and no recession. The bear case scenario is saying like, well, we haven't priced if there is a recession that hasn't been priced in yet. Bear markets when there is a recession, the average drawdowns 48% in America. So there's quite a long way to go towards that. And they start I love, which I saw the other day, that in America that none of the US bear markets in the past hundred years have ended before the recession had begun. 

Adam: [00:25:11] Let me just get my head around that for a second. 

Thomas: [00:25:16] Often share markets will lead them. So bear markets will lead in share. So share prices will fall ahead of the fall ahead of the recession. Right. Because earnings start to fall, that starts to impact the outlook for shares. And so we get you get the bear market before you get the recession. Right. But in the past 100 years, when you've had a major bear market, when there's been associated with a recession, the bear market has never ended before the recession had begun. Right. Which is sort of like the idea that that the bear market has ended now already really hinges on whether there's a recession next year or not. If there is, there's no historical precedent. If there's a recession next year, there's no historical precedent for the bear market ending having ended already. 

Adam: [00:26:02] I'm just A bit sick of being in uncharted. Like it just feels like and maybe it's just because I'm learning about this stuff or not learning as the case may be. But to the hearing about this stuff, but it feels like the last couple of years hearing a lot of this has never happened before. I'm just a bit exhausted because this has never happened before. 

Thomas: [00:26:23] It's partly because this has never happened before is a great rhetorical device in. Economics. Right. Like, it's a neat way to make that point. For example, good bear markets don't end before recessions start.

Thomas: [00:26:36] To say it's never happened before really brings home how statistically unusual it is. So we like that kind of rhetorical device in economics. 

Adam: [00:26:46] What are the global risks we're talking about next year? So that we've got the war in Ukraine? We've got. What else? China's. China's coming out of lockdown. 

Thomas: [00:26:55] That's. Yeah, China is probably the big one. Like it's they've had their zero-covid policy. That's that's hurt the economy a lot more than that is obviously ideal for them and they're having some sort of stimulatory response now. But it's nothing like what we've seen in the past out of China. Yeah. So but the bull case is that the war in Ukraine settles down and energy prices return to normal. China, which returns to growth relatively quickly. The bear case is that none of those things happen. And yeah, things get a lot worse. 

Adam: [00:27:26] There's a double edged sword, too, in China, isn't there? So if China returns to full production, full growth or whatever, then they need a lot of resources to do that, which then brings about a lot of demand and competition in the market that hasn't been there for the last little while because of the COVID zero policy. So as much as we kind of want China back up and running again, it also has its own ability to create problems, right? 

Thomas: [00:27:50] Yeah. Yeah, that's potentially right. And you can probably at a risk there around supply chain bottlenecks and the deal embolisation trend we've seen since COVID, our supply chains are still getting their head around the new geopolitical order and Russia and China and the US becoming, you know, less friendly. That's still creating a lot of changes and that has the potential to create more bottlenecks, which has a potential to create more inflation and more drama. So, yeah, that's definitely in the mix. That said, it's always easier to identify downside risks than upside risks.

Adam: [00:28:23] People are generally pessimistic about things. 

Thomas: [00:28:25] Yeah. Why is that? Because like for the economy to function as normal requires a lot of things to go right. Hmm. So if any one of those things fails, then you get a shock and things go back to get a boost. It's sort of hard to see where that comes from. Things don't tend to go particularly well. That's not really a thing. Like shocks happen, like, you know, like COVID. And then you get a massive monetary policy response and that creates a massive upside. That's, you know, no one saw that coming. That wasn't on the cards at all. 

Adam: [00:28:59] It's not like it's, it's not like inflation wins the lotto or something and everyone's like, well, that's going to have a massive upside. All right. Why don't we? I think that does it for this week and for 2022. Thank you so much once again for tuning in. We really do appreciate it. We love getting all your emails and messages and all the support as saying we wouldn't be here without your support and without the support of Equity Mates media. So thanks to everyone who's joining each and every week. Don't forget if you are still looking for a stocking filler. The Equity Mates Get Started Investing book is available online through BookTopia and all good bookstores. Thomas, maybe we can write a book next year. Probably. All right, that does. Thank you. Once again, we'll talk to you. Have a very safe and festive and enjoyable Christmas season. A happy new year. And we will talk to you again in 2023. Bye for now.