FYI | Jul 23 2008
We have started a new tradition of meeting up with our advertisement agency. Though the original plan was different, I discovered at our last meeting two weeks ago these meetings have now turned into an opportunity for our ad sales people to tap into our insights and views about what comes next for their industry and the Australian economy in general.
It’s all my fault, of course. A few months ago, at our previous meeting, I told them the next thing coming was a slowdown in advertisement spendings by corporate Australia. They looked a bit worried, but ensured me they hadn’t seen any proof or sign of it. A few months later the newspapers have been all over the subject, securities analysts have been slashing their forecasts and many a listed media company in Australia is trading at or near multi-year lows.
It was simply unavoidable that the first part of our next meeting, two weeks ago, was all about what do you guys think comes next? As I learned from past experiences, the person who does the forecasting and the explaining can learn as much from such sessions as those who are listening and asking questions. And this time was no different.
At one point colleague Greg said something along the lines of “it won’t look like there is a recession in Australia, but for many people and businesses in many parts of the country it will feel like there is one”. I instantly invented the term “a hidden recession”; one that will be felt by large parts of society, but it won’t show up in the official statistics. Some companies won’t even know what I am talking about. All thanks to the Commodities Super Cycle, of course.
The problem with such a hidden recession is that nobody really knows what it means, or what it looks like. Does it mean that employment will remain at higher levels for longer? Does it mean that official interest rates will not come down as quickly as otherwise would have been the case? And what about consumer spending? Housing?
In the case of the advertising industry I think we can assume the sector will be going through a recession-like scenario. After all, the biggest advertisers are the Australian government (in election years) and consumer oriented companies, not the likes of Oz Minerals and Alumina Ltd. If they are not looking for new staff, I doubt whether Australian media see any advertisement dollars from these companies at all.
Also, we should never forget that 90% of all Australian businesses are small, very small and a little less small operations, led by entrepreneurs and managers who remain very remote from the stockmarket and from most official statistics – but who nevertheles keep the country running. It is my observation, and feedback, that many of such businesses are doing it tough at the moment.
I live in New South Wales, in a relatively upmarket neighbourhood at the fringes of Sydney. It may well be that in a similar spot in Western Australia people are still happily paying $5 for a coffee, and $10 for a beer, without thinking twice about it, but in my neighbourhood small businesses cannot imagine how quickly downhill things have turned. And now they are worried the worst might have yet to come.
My local supermarkets -Woolworths and Coles- have started offering one discount deal after another. And it works. Of course I’ll buy two for $3 if one normally costs $1.87 – but that’s a big discount, isn’t it?
According to unconfirmed rumours one of the real estate agents in the region had to put up his own pile for sale, only to find out there was no buyer interested! I see commercial property spaces remaining empty for many, many months.
One of the problems with an economic slowdown is that one might as well watch paint dry – that’s how slowly all this siphens through the economy, up until the public reporting of results by listed companies. But have a look at some of the recently published statistics (by the RBA):
– Impaired assets (bad debts) rose by a massive 68.5% in the March quarter. It was the largest quarterly increase on record. Impaired assets now stand at $7.29bn
– The bad debt ratio of banks has jumped to 0.31 in March from 0.19 in December. This ratio has not been at such levels in nearly four years.
– Credit card debt is growing at the slowest pace on record. The average credit card balance stood at $3,115 in May. In smoothed terms the average credit card balance has risen by just 5% over the past year, the slowest growth since records were maintained over 13 years ago.
– Growth in the number of credit card purchases has fallen to 0.9% in annual terms.
Clearly, these are not figures that go with a booming Australian economy. I would be prepared to take the bet that they will look even worse in a few months from now.
It’s because of all of the above that I believe there’s still enough bad news ahead of us to prevent the next big upswing on the stock market from growing into anything else than simply another bear market rally. Some wiseheads may point out that developments in the US are likely to be of higher priority than what happens in Australia, and I agree with that view, but I don’t see a rosier picture when I look across the Atlantic Ocean either. (And as most of you will be making investment decisions in Australia, I thought it better to focus on the Australian outlook).
Could it be that investors in the share market will have to wait until the RBA starts lowering interest rates before Australian banks, and thus the wider share market, can confidently recover (and sustainably so) from their recession-like share price levels?
Now this is an interesting angle, as it brings us back to the “hidden recession” Australia is forced to struggle with. Economists at TD Waterhouse predict the RBA will start cutting in the final quarter of 2008 – but is their view premised on an open recession as opposed to the “hidden” one?
What about Westpac economists who seem convinced that interest rates will remain on hold until 2010? They seem very much in tune with the Super Cycle consequences.
Economists at GSJB Were changed their view on interest rates this week. They too believe there will be no more rate hikes during this cycle as it gradually becomes clear that the non-Super Cycle part of the Australian economy is doing it much tougher than expected. From what I’ve read, I got the impression they believe the Australian economy is likely to hit its deepest point sometime in the first half of 2009. This will force the Reserve Bank into cutting interest rates from mid-next year onwards. GSJBW has penciled in three cuts of 25 basis points in rapid succession for the second half of next year.
Analysts at the banking sector desk of the stockbroker jumped on the switch by their economists by pointing out that banks have traditionally always performed well whenever the overall market focus turns towards interest rate cuts. This doesn’t take away that such a change in overall market sentiment doesn’t seem to be near. Unless TD Waterhouse economists will be proved correct, of course. But under all other scenarios investors will have to wait a little longer still.
Be careful in drawing any hard conclusions from temporary movements in share prices. We have been here before. I am sure you all still remember.
Because something’s hidden, it doesn’t mean it isn’t there.
Till next week!
Your editor,
Rudi Filapek-Vandyck
(As always firmly supported by Sarah, Greg, Grahame, Joyce, Todd, George, Paula, Pat and Chris)
