Rate Club - The RBA Has No Crystal Ball!

Dr Chris Kent, the RBA's assistant Governor, this week has made two puzzling statements that go to the credibility of the Reserve Bank.

Chris Kent's key remark was to flag "the abatement of those two substantial headwinds" and highlight that this "would be a marked change from recent years".

They confirm economist Clifford Bennett's comment that it is the Redundant Bank of Australia. Why is our Government allowing it to direct our economy and not our elected representatives, as when this used to happen? Giving the RBA non-elected bureaucrats control of our economy is just a recent experiment of Treasurer Costello some years ago during the Howard Government.

It's time to reverse it!

Readers would know that we never had a mining boom but a mining mirage. The boom only affected 4% of Australians that were directly employed in the mines. Unlike other booms the mining boom did not spread through the whole economy. Indeed most of the wealth went either back to overseas shareholders funding the resource sector or to overseas suppliers. This went to pay for mining equipment, railway lines and port facilities.

In Chris Kent’s statement he made several admissions. The first, that the RBA "failed to anticipate dramatic falls in commodity prices over the past four years".

It gets worse. He then admits "growth in both the economy and employment had been better over the past four years than the Reserve Bank anticipated".

The problem with the latter is that he is saying that the high unemployment rate that we've endured over the last four years, the RBA expected it to be higher yet they twiddled their thumbs doing nothing to bring it down. They sat on the world’s highest interest rates!

Next in the speech he admits that inflation and wage growth had been weaker than expected. So we have an RBA without a crystal ball. An RBA that admits the most fundamental of economic forecasting it gets wrong!

How much credit can we put in the RBA's predictions going forward now?

You and I know that the mining boom was a mining mirage yet now the RBA is forecasting a rise in employment in the resource sector that will lead to a drop in the Australian unemployment rate and an increase in wages. The RBA still hasn't learnt that even in a boom the mining sector only employed 4% of Australians. The RBA then was putting all its bets on the mining boom creating jobs across 100% of Australia - how foolish. Yet, annoyingly, they haven't learnt their lesson and still believe in a mining boom!!!

So the RBA over the last four years didn't see the oversupply of iron and coal into the world market reducing prices. It didn't see anything wrong with high unemployment and indeed expected it to go higher! In the last four years it didn't anticipate the economy to be as strong as it was but again sat there with world high rates reducing our export income and tourist income.

What else are they failing to see?

The mining mirage fooled the RBA. I believe our gross domestic product, or your wealth, is again a mirage that is fooling the Reserve Bank. Fooled into believing that your wealth is greater than it really is. If you strip out export income from our gross domestic wealth you will see that we are descending, not rising. They're ignoring business investment as a share of GDP, has crashed over the last four years from nearly 19% down to just over 13%. Nonresidential building approvals over the last four years have slipped from 2.5% of GDP to just 0.5%. Engineering share in the same time has dropped from 7% down to just over 3%. Machinery and equipment has dropped from near 6% to under 5%. Household disposable income has been on a steady downward trend since 2007 where it was 10% growth each year to now 2%. Our ability to save has also similarly fallen. Retail sales growth has been in steady decline as well over the last four years from 4% growth (well below its previous average of around 6%) to now tottering below 2%. Wage growth has been consistently less than 2%. Take tax out of that and the ridiculous Super levy leaves little to go into spending and creating real jobs.

So my argument is, I believe we're heading to a recession.

We went to an election in a credit squeeze bought on not by an elected Government but by a banking oligopoly - or is it a monopoly?

You can see here clearly that when we had banking competition between 1995 and 2009 there was ample credit. From 2009 you can see the dramatic drop in credit as the banks followed the RBA's Luci Ellis's direction, to bring on a credit squeeze. "Fatten your margins and put quality into your loan book". This advice to the banking monopoly was feverishly endorsed by APRA who urged restrictions on lending to investors and further increased interest rates to investors.

How to be a winner?

Get ahead of the market. Anticipate that negative news will soon be spreading through the media as they belatedly wake up to reality that you are being squeezed, and suffering, and can't spend. What will happen then? We will see an end to the RBA and APRA's stupidity on the credit squeeze front. Funds will start to flow, people will start to spend and jobs will be created.

There will be a wave of positive enthusiasm spreading through the spending community. Buyers will see a resurgent market across the country. How you win is to anticipate these upcoming price rises from the demand increase and get in now while buyers are finding it difficult to get funds - thanks to APRA and the RBA. Get in now while builders are finding it difficult to get pre sales because of RBA and APRA.

In short - get ahead of the markets!

Happy Investing!

Kevin Young Club Founder