Why the Australian economy is stuffed

28 August 2016 2:35 pm

During the week, we had the Australian Treasurer Scott Morrison trash talking the Australian economy, warning that Australia risked falling into a recession. It’s not a good look.

He also talked about “the taxed and the taxed-nots”. Not exactly an original phrase. He borrowed it from Fox News nut case Dennis Kneale. Morrison borrowed Kneale’s line that a large proportion of households weren’t working and were on benefits. Maybe Kneale scripted him.

So how bad is the Australian economy?

The problem is the recent profit figures have shown that big Australian corporations are moving into the “no-taxed” zone. During the week, we saw Australia’s two biggest retailers Coles and Woolworths reporting $5.5 billion in losses, created by impairments, write-offs restructuring costs and other charges, all in 2015-16 alone. Then BHP reported a record $8.3 billion loss on the back of writedowns and the Samarco dam disaster. And then companies like QBE and Wesfarmers reported big drops in their profits. And all the banks are now struggling carrying bad debts.

The reality is we are now witnessing a very typical pattern right before recessions and market collapses. The market’s price-to-earnings (P/E) ratio is currently at a level seen only before recessions. First, we can look at earnings (the E in P/E.) Earnings have stalled. Yet prices (the P in P/E) have still rallied. This pushes the P/E ratio upward, leaving it out of whack with reality. The reason it’s going up is because of low interest rates. The money always pours into markets when there’s low interest rates because market yields are sexier than 1 per cent in CDs. And also, companies can borrow billions of dollars in debt at lowest interest rates. This allows them to buy-back their own shares sending up the share price. Of course, executives are making themselves rich doing that. They are mostly compensated in shares so they’ll do whatever they can to boost share prices.

Corporate buybacks boost shares in a couple ways. First, it can create the illusion of earnings-per-share (EPS) growth. When earnings aren’t growing, share buybacks reduce the number of shares. With a lower number of outstanding shares, earnings magically seem better on a per-share basis.

And because companies can borrow billions of dollars in debt at super low interest rates, they can buy-back their own shares with minimal capital risk. It’s a cheap way to boost the stock price. And the market has loved it. That's certainly true for the one per cent who have shares.

Not so much the rest of the population. Australia’s unemployment is sitting at 5.7 per cent and the only thing that’s keeping it there is all the low-paying part time jobs that have been created. In the last set of numbers,72,000 part time jobs were created but there were 45,000 fewer full time jobs. Overall this year, full-time employment jobs have fallen by an average of 9000 per month, while part-time jobs have risen by an average 19,000.

Add to that wages growth which is now stuck at a record low of 2.1 per cent.

So overall, the sharemarket is booming. But look behind the numbers and we’re heading for trouble.