Decoding the Australia-China Economic Ties: Impact on Exports, Property Bubbles, and Demographic Shifts with Tarric Brooker

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What if I told you that Australia's economy is more closely tied to China than ever before? Join me in an insightful conversation with Tarric Brooker, a seasoned expert in geopolitics, finance, and economics with experience at News Corp and Hill Tower Resource Advisors. We unpack the mixed bag of the Chinese economy, its impact on Australia's exports and budget surplus, and delve into the world of property bubbles and engineered glide paths.

In our discussion, we explore the fascinating relationship between Australia and China, touching upon the effects of rising inflation in China on Australia's economy, and the Australian federal government's reliance on commodities to fund its spending. Additionally, we examine the potential devaluation of the Chinese Yuan and its possible impact on the Australian dollar. We also analyze Australia's unique response to rising interest rates and its precarious position with 85-95% of mortgages being variable rate.

Lastly, Tarric and I discuss the disinflationary and deflationary forces of widening wealth gap, demographics, and technology, and ponder the changing narrative of demographics post-COVID. We consider how AI may replace the need for more people, and explore the potential unique case of Australia's boomer-powered economy, where older Australians are an aggregate exceedingly wealthy. Tune in as we debate the possible short term inflationary effects of the reminder of death in the midst of the COVID lockdown, compared to the longer-term deflationary effects.

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Transcript

Speaker 1: 0:01

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions. Don't forget to follow at LeadLag Report on Twitter to join these conversations live and check out the LeadLag Report at wwwleadlagreportcom. Choose promo code podcast30 for two weeks free and 30% off to get access to award-winning research and anticipate stock market crashes, corrections and bear markets. And now onto our LeadLag Live discussion hosted by Michael Gaiat.

Speaker 2: 1:14

My name is Michael Gaiat, publisher of the LeadLag Report. If you're interested in me for the hour is Tarek Bicker, the avid commentator. So, Tarek, introduce yourself to the audience. Who are you? What's your back? How did you get involved? Interested in journalism, and do you really look?

Speaker 3: 1:27

commenting on everything. So I certainly do. I've been doing that for a long time, and I actually got into journalism originally because it was an outlet to stop annoying my girlfriend with all my ranty things that I talk about with finance and economics. So yeah, i've been doing this for a long while now. I started out just doing pro bono work as a journalist and eventually I worked my way up till I was working for News Corp. So I worked for one of the largest multinational news organizations in the world, where I basically have my own weekend write-off on geopolitics, finance, economics, you name it generally from an Australian perspective. And more recently I have also been working with the great Tracy Shuhart, aka Chi Girl, on Twitter, working for Hill Tower Resource Advisors. So yeah, a lot to do and a lot to talk about.

Speaker 2: 2:18

When we see a trillion perspective, maybe different from what you've seen in the West. I mean everyone, i think, at the end of the day tries to play the pundit when there aren't TV, but some pundits are more knowledgeable than others.

Speaker 3: 2:30

I think the difference, say you know the Australian perspective is that we are very much from the outside looking in, and you know that comes with its own inherent strengths and weaknesses. On one hand, you know, you see things arguably a little bit more disconnected and dispassionately, so you're forced to be more data driven than you would be, you know, when you're in the US, where you can actually observe things with your own eyes and you actually get a feeling for things. So that's sort of you know the upside. But then also the downside is just that you know as Australians we are very much captive to the moves of the larger economies, you know, to the US, to the EU and particularly to China. So you know it does give us that unique perspective, but we also see the downside at the same time.

Speaker 2: 3:12

Okay, so we're going to be touching on two-to-lone payments, especially that you did some work there. But since you just mentioned China and being captive to larger economies, i want to get your take on where the China economy is like. Otherwise. At the start of the year, everybody was saying that reopening is going to be wildly bullish for China And it turns out that's not really been fully true. It seems like there's some selective lockdowns kind of happening again. How has the Chinese economy been faring and how is it impacting trillion economy currently?

Speaker 3: 3:40

It's very much been a mixed bag so far. You know you've seen a strong performance of the services sector. You know we saw a bit of a boost for the manufacturing sector at first as the Chinese economy sort of, you know, reopened and refired following the end of, you know, that long period of lockdown. But when you really look at it in more broad terms, you know China has over 20% youth unemployment and things are getting quite a bit challenging in that regard. So you know there's really that two-speed economy going on And there's all these different competing factors. You know there's issues with local government debt, there's issues with you know, the continued, you know well the Chinese property sector remaining in the doldrums.

Speaker 3: 4:19

And you know now even, you know, with falling steel demand And that, i think, is probably a good segue into, you know, how that's impacting Australia Because you know we've seen, you know iron ore prices more than half from where, from their previous peaks were.

Speaker 3: 4:33

And you know we're seeing falls now in the prices of coating coal, which you know coating coal and iron ore are, you know, two of Australia's, depending on you know, the day and the price, but generally there are two largest exports. So that's a fairly significant blow there for Australia as those prices fall. And you know, i mean we, recent Australia recently recorded its first budget surplus in what is it now, 15 years? on the back of these rocketing commodity prices due to the war in Ukraine and due to, you know, these, this demand from China. But now that demand's fading, i see that you know, a much, much more challenging time ahead And you know, just on the topic of the property sector, they're really trying to engineer more of a glide path down rather than a reignition of, you know, the Chinese property bubble that you know President Xi and some of his predecessors have spent so long trying to push back on.

Speaker 2: 5:23

Now, So I've had others on Twitter space talk about the Australian property market and the dynamic of very wealthy Chinese citizens buying up property in Australia just to take money out of China. It seems this has been a kind of a big distorting factor And there's a lot of concern around property prices in general. correcting That glide path that you mentioned, what's the likelihood you think of that happening? if you have a US housing recession which I still think myself it's coming at some point, presumably that's an impact. you know sentiment across the globe.

Speaker 3: 5:55

One would imagine. So I mean, like, in terms of, like, you know, the Chinese property sector's glide path. I think that that's very much being actively managed. You know they've got all these different tools that they're trying to, you know, implement at any given time. You know whether it's, you know, cutting deposit rates to try and drive more investment into property, because that's something that we've actually seen. Like, if you look at where Chinese households have allocated their wealth and allocated their, you know, their additional net worth or their additional capital that they have amassed across the pandemic, particularly more affluent households, instead of it flowing into property where it has more historically, it's now flowing into savings. So I think that they're trying to manage this glide path for the Chinese.

Speaker 3: 6:37

You know property sector is going to be very difficult because you know they're constantly trying to, you know, pull different levers and push different buttons and switches. But when it's something like the Chinese property market, like I'll give you, i'll give you an example of why this is so difficult. Compared with, you know, say, for example, the US or elsewhere in China, only about 13% of new homes are purchased by first-time buyers. The other 87% are purchased by people who have one or more houses already, so it's very much a speculative market. So then you've got President Xi coming out and saying houses are for living in, and then repeating that over and over again, saying, well, we need houses for living in, for what do they call it Common prosperity? It's very difficult to then reignite the demands they need in order to maintain that glide path and for it not to turn into something more of a crash, which is why I think we're seeing this stealth nationalization of the Chinese property sector.

Speaker 2: 7:37

That's certainly an interesting dynamic. And the point about steel and coke and coal, i mean it is true that there is a commodity disinflation pulse that's taking place Again. The expectation of the story of the year was that you'd have a re-acceleration of inflation because of the reopening and demand for commodities on that reopening. But clearly that's not playing out. Do you get a sense that the narratives that were so strong last year as far as why commodities were in a secular bull cycle, that's just not playing out when you look at the actual activity going on in China.

Speaker 3: 8:08

Generally, yeah, i would agree. I mean you haven't seen the construction sector recover. You haven't seen these big pushes for stimulus and activity that you would normally associate with the re-acceleration of the Chinese economy. But I think that the commodity story is really going to be a varied one going forward because, say, for example, you've got copper. Copper has historically low levels of inventory.

Speaker 3: 8:33

There's issues propping up with geopolitical and local political issues in many commodity producing nations. so copper producing nations. But at the end of the day, copper is also beholden to It is Dr Copper. It is beholden to global markets. So it is being dragged down by that impulse, even though demand is still relatively robust globally. But then you've got the other side of the coin and you've got things like iron ore and coaching coal which are at the moment a lot more receptive to that downturn in steel demand, the downturn in steel production.

Speaker 3: 9:09

But I think that one of the things that one really needs to be careful with the Chinese economy is that it can move very quick. commodity prices in China can move very quickly. I mean, like we've seen iron ore enter a new technical bull market literally in the last what is it? A little over two weeks, just because policymakers have said we are going to pull stimulus levers, even though those stimulus levers, to me and to a lot of other people, including the Chinese government themselves, are very much more tinkering around the edges rather than the 2008 style fire hose of stimulus and liquidity.

Speaker 2: 9:46

Yeah, and just like full of Russian speculators. Russian right, yes, it's just kind of a self-fulfilling proxy on that. Are the links between Australia and China as strong as they were during the commodity supercycle? It used to be the case that if you wanted to really know what China's economy is doing, just look at the Aussie dollar and get a sense of sort of currency relative movements. But has there been more decoupling over the years or is there still a pretty big impact in terms of the way China affects Australia?

Speaker 3: 10:13

It's really a mixed bag, depending on your perspective. If you look at it purely from the number of different exports, say, for example, China had punitive trade actions against Australia on things like barley and wine and crayfish and pretty much anything that you can imagine that wasn't directly feeding the Chinese economic story was hit. There was a list produced by local banks here in Australia, the Commonwealth Bank, and it was basically just yellow meant it was impacted and it was a sea of yellow. But in terms of value, purely in terms of overall trade volumes, australia hasn't really decoupled from China at all. In fact, it's actually become even more reliant than it was during the commodity supercycle, because when the commodity supercycle kicked off after the global financial crisis, Australia still had very strong trade volumes to places like Japan and South Korea And as China has continued to grow, its economy continued to grow its demand for commodities, it's China now is larger source sorry, a larger destination for Australian exports than the next three nations combined.

Speaker 3: 11:22

So Australia is more reliant than ever And I think the thing is because the Australian economy, and in particular the Australian federal government, is so reliant on commodity prices and through revenue in the form of company tax and revenue in the form of mining royalties. It really is a direct import into the Australia's broader economic fortress because it influences how much scope the federal government really has to spend. And I mean, even if you look at, say, something like the Australian dollar versus the US dollar, versus, and then the Chinese Yuan versus the US dollar, when you look at them over a long enough time period, they're very similar. It's still very much a trade on China from just using the Aussie dollars of proxy.

Speaker 2: 12:09

I'd gotta assume that it's going to make the RBAs path forward maybe more challenging. I believe they basically to the idea that there's still more rate hikes coming. Talk about just the central bank side of things or a bit in the context of inflation domestically in Australia and sort of the outside global inflationary pressures that might be coming into Australia.

Speaker 3: 12:30

Well, i think the first thing to understand about Australia relative to the rest of the world is that our inflation is lagging, while the rest of the world is now experiencing, or heading to experience, the sort of worst of the base effects that are coming in terms of energy prices. For Australia, our energy price shock is still yet to arrive. We have experienced it in terms of higher fuel and diesel costs, but in terms of, like, electricity prices, gas prices and when I say gas I mean natural gas, lng, the homes for heating, et cetera that's still yet to come. We are talking still about 25, 30, 35% increases that are still yet to feed into the system. I think it's also worth noting that, due to the way that the methodology operates here in Australia in terms of how our CPI is calculated, there is still a great deal of, there's still a great deal of inflation to come from rents, because, while, say, for example, the US and other nations have now seen the drive from rental inflation in the CPI peaking and now rolling over, here in Australia we're still probably at least six months of data away from the peak, and that's at the earliest, because if you look at the data from, say, private providers, they say that rents are up somewhere between 13 and about 26%, whereas the CPI says up by about five. So there's still a lot of scope for the Australian CPI to continue to remain strong And while there are obviously base effects we have of our own which are going to help blunt that impulse, i think it's going to help keep Australian inflation uncomfortably high for the RBA.

Speaker 3: 14:12

And just to go back to the point that you made about China and the inflation picture here in Australia, there is quite a bit of talk on Twitter from the likes of Michael Cowell and some other people who I very much looked to and respect, on the issue of the Chinese Yuan. We're talking about a devaluation And if they devalue their currency and the Australian dollar responds in time particularly given the fact that it's a historically weak position compared to where it has been in recent years, that could see further downward pressure on the Australian dollar. Particularly if we see a broader risk off moment in global markets which I'll judge you by some of your tweets this morning we may be getting in the not too distant future. Particularly if that barrens cover ends up being the contrarian indicator that it sometimes is, then the Australian dollar could get hammered And the RBA is very much concerned about importing inflation, which should end up forcing rates higher.

Speaker 2: 15:10

Although the same goes to say the fact that I'm getting nervous about it means that market keeps going higher. It doesn't think I was a very indicator, even though I tried to identify this from the standpoint of conditions, but I think you're bought on and, yep, you haven't really had a sort of classic risk off flight to safety. Really, at our guess it's the COVID crash. I mean, last year was not flight to safety risk off because bonds didn't respond And the currency movement was all over the place, unless you were obviously just long the dollar. But it is going to be interesting to see how global volatility picking up could impact the inflation side of things for different countries. That point about lags, i think is underappreciated.

Speaker 2: 15:47

I keep going back to here in the state, the regional banking quotes crisis that we saw in March, which now everyone forgot about, by the way, given the AI narrative But that was not based on interest rate hikes from this year. It was based on interest rate hikes from last year. Now, yeah, markets are more efficient, but the reality is it's that old, long and variable lags between interest rates, inflation, the economy. Do you get the sense that Australia, those lags you kind of allude to it tend to be longer in terms of the impact of CPI versus other developed economies. I mean, the eurozone is already in recession and they still aren't high-grade, but again that actually lags. So I'm trying to get to sort of those delays. Is something unique about Australia in terms of when those rate hikes really factor through?

Speaker 3: 16:32

Yeah, i would say that things are quite unique here because Australia has to start. I mean, i think that Australia needs to be sort of just put into a different context than the US and other nations, because we haven't had a recession, a proper recession, outside of Covid in 32 years, so for a very long time. It's very much changed the perspective of Australian consumers to think that nothing bad is ever going to happen. I'll give you an example Here in Australia, consumer competence is at its lowest level since the height of our last recession, during which unemployment rose by 5%. Yet the problem is people are still spending. Only now we're starting to see this contraction in overall spending and it's taken quite some time.

Speaker 3: 17:20

So Australia is unique in that regard that people believe that tighter monetary policy is transitory, and there's also the fact that historically, around about somewhere between 85% and 95% of Australian mortgages have been variable rate. We are not like the United States and other nations, which have a high proportion of fixed rate mortgages. So theoretically, australia should be affected more quickly by rising rates, not less. But because of the fact that the RBA ran basically a big cash handout for the banks in terms of low funding costs, we saw this huge uptick in people paking on fixed rate loans to the point where they took up about 40% of the overall loan books, so that as well has blunted the normal monetary policy reaction here in Australia And I just think that people just aren't prepared for this idea that we could have a recession and that things could get quite challenging.

Speaker 2: 18:24

And expand on that variable rate for a moment, i've had several people on these spaces from Canada, for example, which has the adjustable reset. Is it a similar structure in Australia, where there are certain dates where there's almost like a bulleted reset of the mortgage rate?

Speaker 3: 18:39

Yeah, Well, i mean, what they did during the COVID was that they basically pinned the three-year bond yield at 0.1%. So that created this big rolling block, this big block of mortgages that were written at the lowest possible rates. I mean, you're talking about a mortgage. Realistically, they were written, based on the RBA's data, at around somewhere between 1.9% and 2%. So there's this big glut of mortgages up to about I think it's about 35% of the loan book that has been expiring and will continue to expire. That is just rolling off And I think it's worth noting just how large an increase that these borrowers are seeing.

Speaker 3: 19:24

They're seeing their rate go from about 2% to the prevailing rate at this point is about 6%. So they're seeing their interest repayments triple And that is larger than some of the case studies I've seen from the likes of CNN and others who've put them together, from what happened in the US during your housing crash, because they had these teaser rates which were significantly lower than market rates, which is exactly what happened here in Australia lower than our standard variable rates And then the people are rolling off on these loans and they're just ending up getting absolutely wrecked by these higher rates, and I think one of the major reasons why we're not following the US down the garden path of the housing crash is just the fact that the banks here are willing to, just for the moment, just look somewhat the other way.

Speaker 2: 20:20

You just made me very fucking bearish on it. Really, give me what you just said. You may need to have a real risk off period to correct that. Otherwise to your point, consumers are going to get screwed over when they suddenly start realizing that their cash flow is hugely impacted.

Speaker 3: 20:37

Yeah, well, i think the thing is that there's so many different aspects of the Australian economy that are looking sick. I'll give you an example. The US has had issues with falling real wages gross and falling household purchasing power because, obviously, inflation has significantly outstripped wages growth up until relatively recently. But here in Australia, prior to the pandemic, real wages growth was very weak, so Australian real wages today are now back where they were in 2009. And things are only going to get worse in that regard because inflation is going to continue to outstrip wages. I mean, the last inflation print on a quarterly basis was around 7%. Wages gross is 3.7%, so households are still losing purchasing power in a big way.

Speaker 3: 21:27

But I suppose, to go back to, the differences between Australia and elsewhere, is that there's still the beliefs that everything is going to be OK. Everyone's perfectly happy to hold on by their fingernails and just hope that things are going to turn out fine Because, in fairness to them, australia has endured crisis after crisis and having prices have risen and everything's turned out OK, like we had the Asian financial crisis, we had the bursting of the dot-com bubble, we had the global financial crisis, we had COVID, and Australia has emerged stronger, on paper, at least after each and every one. So I think that's the problem with betting against the Australian housing market and betting against the economy in that regard, because everything is fine until all of a sudden there isn't, and then I think things are going to get very interesting.

Speaker 2: 22:16

Right, but there's also a key difference, also with Australia versus the West, which is that you said earlier that surplus I mean you're coming from a place of government balance sheets shrink, whereas any kind of crisis in the West, the answer is just to print more money, which just causes a re-leveraging.

Speaker 3: 22:34

Yeah, i think that the surplus is a bit of an aberration. I mean, australia has historically, prior to the global financial crisis, it ran surpluses all the time. It was just the done thing. It was politically demanded by the electorate, which is a bit strange when you think about it, but it from a space perspective, but it was just the way things were done. And still, to this day, fiscal responsibility is valued by Australian voters to a degree that I would say is not present in a lot of other Western economies.

Speaker 3: 23:04

But the current surplus is very much a product of the war in Ukraine and the massive run-up we saw in coal and, in particular, lng prices, which has really helped the Australian government achieve this. What a lot of people are calling a miracle, because there was prior to the pandemic, there was still this deficit after deficit, and I mean I'll give you an example that our parliamentary budget office so, which is like the equivalent of that, the CBO in the US recently produced a projection for Australia's economy and Australia's fiscal balance going all the way out to about 2040. It was large deficits as far as the eye can see. Eventually, this will come to an end of this time of extremely high commodity prices driven by the war. Well, it will come to an end eventually. It will depend on what happens with the war, but I don't think it's terribly sustainable. I think that the government here knows that.

Speaker 2: 24:02

So those in the audience will know that the Twitter space does not address Australia addresses student loan payments. So I know you said you did some work on this. First of all, why is it you look at student loan payments in the US when you're in Australia?

Speaker 3: 24:18

Well, the thing is, your economy is the one less powering the global economy at this point. The Europe's in recession, china is not performing well and really the US is the main driver of growth that's really still standing. It's also the fact that US markets in terms of rates, in terms of pretty much everything else, guides outcomes for Australian markets. I guess it's for people in the US that I spend too much time thinking about Australia, but here in Australia we spend a whole lot of time thinking about the US economy because, i mean, i'll give you an example There was recently a report from one of our big banks talking about the possibility of an Australian recession. The possibility of an Australian recession was basically entirely predicated on whether or not the US had a recession. If the US had a recession, well then the chances of an Aussie recession got a whole hell of a lot higher.

Speaker 2: 25:44

No for sure That makes a ton of sense. Okay, so let's go through the student loan payments, resuming For those that are out of the loop. maybe you're not thinking about student loans. maybe it's outlined a little bit of just what happened last three, four years, with student loans pausing where we are now.

Speaker 3: 25:59

Okay. When the pandemic struck, the Trump administration basically paused student loan payments. You could keep paying them as you wanted to, but there was a forbearance period. 45.3 million Americans had the ability to basically just not pay their student loans. Well, most of them didn't. A study performed by for the New York Fed have found is that about 84% of student loan balances were not paid down during that period. Basically, people just took advantage of the extra cash in their pockets. That particular policy was extended again and again by the Trump administration at first, and then by the Biden administration.

Speaker 3: 26:44

We're coming up now on three and a half years. Well, it will be three and a half years by the time. This concludes that it's been running and basically injecting a whole bunch of extra cash into the US economy. The average monthly student loan repayment has the latest data is about $460. So if you take that, multiply it by the number of students, it comes to about $213 billion a year which is being injected. $250 billion a year being injected into the US economy. So that's about 0.95% of GDP, which is why we live in a very strange time of these enormous programs that we saw during COVID. In relative terms, that's a fairly sizable boost to the US economy.

Speaker 2: 27:26

There are studies that show that, just given you know you're talking about younger citizens, right, i mean that spending that was done because of the pause resulted in more distortion. Just if you have an abatement of paying off loans and you're older, you might do it pay off other loans, right. And there's a lot of studies that show that last stimulus measures ended up actually going back to paying off credit card debt or other dynamics for older generations With younger generations. Was it more a privilege spending that took place? do you think?

Speaker 3: 28:00

I would imagine. so I mean, i think the thing is we lack the clarity of data in the sense that it's difficult to separate the impact of the pandemic and the impact on, you know, consumers' like ology, because even some of the older people who were receiving this, i mean there's plenty of people who are, you know, boomers, who are now spending money handover fist that they wouldn't have before. So it's a bit, you know, sort of distorted in that regard. But even if you just even if you look at the student loan pause purely through the lens of a fiscal transfer to household, you know, in a very broad sense, it's still a you look, the fiscal multiplier on something like that is still about well over 100% of its cost.

Speaker 3: 28:47

So I mean, there was a study done by Moody's following the Obama stimulus you know, the American Recovery and Reinvestment Act, which was passed in 2009. And that's found that somewhere between 108, and that study found the GDP was increased by somewhere between 108 and 122% from these direct fiscal transfers, and that was in the form of tax rebates. So I think that there's a sort of fairly similar relationship there. So, you know, i think this is a fairly sizable contributor to keeping the US economy. you know a flow keeping the US economy growing but also driving in additional inflation pressures across the time it's been in place.

Speaker 2: 29:28

Do you get the sense that investors, traders, the media in general they're underestimating how large of a drag that could be on the economy? Could that be one of the reasons that the Fed doesn't agree to even work?

Speaker 3: 29:43

I think it's possible that that's part of the flow. I think it's definitely part of the Fed's thinking. You know what I mean. It's an absolutely huge input, but I think that this, while this is a rather sizable thing, i think it's quite possible that just ends up being the straw that breaks the cabinet's back.

Speaker 3: 29:59

Because the US economy is not in an amazing place to begin with, and you know, we've seen, say, for example, you look at the various Federal Reserve regional PMIs They're not in a great place And they're already well and truly in contraction, as is the border manufacturing sector if you look at any number of indicators.

Speaker 3: 30:17

But the services sector is still holding up okay, and one wonders if that is being partially driven by the ongoing student load pool. I think it's also worth noting that there's still hope that the conclusion of the pools won't be as damaging as initially thought, mostly because the Biden administration's executive order to cancel all that student debt for eligible holders is still to go before the Supreme Court. So a lot of people so, while you may have, while if this was all 100% certain, set in stone, concrete people would have been thinking, well, maybe I should start preparing to pay my student loans again There's still that hope that a sizable proportion if not all of a person's student loans could still get paid off if the Supreme Court decision goes the right way. So I think that in that way it's going to be perhaps more of a shock than it would be if it was another policy expiring.

Speaker 2: 31:13

Just reset the room for the meeting. some odd minutes here, everybody. please make sure you follow Tarek Brooker. I'm sure he'll be an avid commentator if you DM him as well. This will be a paper platforms under Lee Lag Live. And again, if any of you want to come up and ask questions, click that bottom left micro quest button. It's pretty much in the year, obviously in the state. Do you get a sense just now? it's that, looking in that this is going to be some political talking point or is the Biden administration going to try to do something else to try to counter this dynamic or is this kind of a fit to complete?

Speaker 3: 31:46

I think it's going to be a turn into a political football. It was already used as a bit of a political football and debt ceiling debate. I mean, one of the conditions of the Republicans was that, basically, student loan payments are zero because they believe that they are inflationary and that the pause is inflationary. I should say I mean, in fairness, injecting $250 billion a year extra into the economy is inflationary. I do think that it's definitely going to get turned into a political football because at the moment, biden doesn't have the votes to be able to get a debt cancellation bill through Congress, or I should say, a large-scale debt cancellation bill through Congress. If the executive order gets knocked back by the Supreme Court, then it's going to be a pretty major talking point going forward because, I mean, it's a pretty powerful vote grabber.

Speaker 3: 32:38

If you're someone who has a lot of student loan debt, you've seen it resume. It started to really hit you. You're struggling with the cost of living already. You've already had negative real wages growth for quite some time. It's a pretty appealing thing to have a politician promise to knock up to $20,000 off your debts, and especially if they really want to go the whole hog and you end up seeing someone like Elizabeth Warren or AOC or someone getting involved in this and they start pressing for something even larger as an election ploy, then I think it could be quite a driver to get people out to vote.

Speaker 2: 33:17

Thinking about this, i would think that the parts of the economy that would decelerate the most would be probably anything related to travel, leisure, hospitality. If you're a student, you didn't pay off your loans, that's a little extra cash to go travel across, whatever country you're in. Well, the US, obviously, were outside Any sense of. if you think certain industries would get more impacted than others, that's the one that stands out to be the most, but it's got to be a lot more than that.

Speaker 3: 33:46

Yeah, no, i think you've hit it pretty well on that, because a lot of say, for example, if you had all this extra cash, a lot of people went out during the pandemic and they bought a television, and they bought a laptop and they bought all manner of goods.

Speaker 3: 33:58

But, as you say, well, the data shows that particular set of demand has largely been sated and you've seen that, for example, with deflation in multiple consumer goods categories. I think you hit the nail on the head in terms of it being about services and even just about experiences, whether it's a trip to the local nail salon or whether it's a trip to a bar with the boys or whatever, or something larger. Those are the sort of things that I think are going to get hit. I think it comes at a challenging time, just purely based on seasonality as well, because it's going to be coming on the 30th of August, provided there isn't some other form of intervention by the Supreme Court It's coming at the end of summer, heading into winter, and it's coming as well amidst a slowing economy. I think that these seasonal-based businesses, travel, etc. They could really end up having a hard time when all this comes to a conclusion and perhaps a bit of a rude awakening when those, shall we say, discretionary travel times resume in the new year.

Speaker 2: 35:06

Yeah, that makes a ton of sense to me. I've noted this many times. I have a piece I'm publishing on Seeking Alpha shortly on this, but it does seem like anything that's consumer or retail oriented is already starting to discount as low as, or even a recession in the US. You've got the headline averages, which are primarily driven by the Mega-5 tech names, but the reality is beneath the surface. Those areas which are most sensitive to the consumer economy are just not performing well. If you believe the market is a discounting mechanism of the future, those areas which are most sensitive to a slowdown consumer spending they're already telling you something is coming.

Speaker 3: 35:43

Yeah, no, I concur.

Speaker 3: 35:45

I think it's just worth noting that it's about the makeup of the consumer economy as well.

Speaker 3: 35:49

I mean, it's about the fact that the people say for example, a lot of the people who perhaps hold these debts the repayment pause is the thing that's keeping them going, It's the thing that's keeping them consuming By this pause continuing. It's giving them that extra $400, an average of extra $460 a month that they have to spend on their leisure, on these discretionary services that they otherwise wouldn't have. But as you move up the food chain in the US consumer economy, you're still seeing relative strengths for the more affluence. I think that's what makes this such a potentially powerful driver of outcomes in the US economy, Because if you do start to finally see that profound deceleration at the bottom end of the US economy, eventually it spreads to the top, just like it did in 2009. It's not going to spread as fast without a crisis, but eventually it does spread to those upper echelons who are perhaps quite insulated from the realities on the ground until things could really go wrong, either in the economy or in financial markets.

Speaker 2: 37:25

So, but the eurozone maybe a little bit more, just given recession and still high traits. I mean, maybe it's deflation, maybe it's not, but I thought that it's intriguing to me that there's still this narrative of growth and reflation, while German manufacturing and industrial activities just kind of breaking down pretty substantially. Do you think this is a temporary recessionary type of juncture for Europe, or could we be in a more prolonged type of environment? Because if it's more prolonged, it's only a matter of time until the US must respond to that, i would think.

Speaker 3: 37:55

Yeah. No, i think it's going to be a more prolonged thing, because I have a hard time seeing them getting wages growth under control in Europe because so many various different unions and organizations have their wage demands or even just directly set by the CPI. So Europe is going to have a fairly substantial problem controlling wage inflation, which is going to keep things well challenging for them for quite some time to come. And it's also the fact that cheap Russian gas probably isn't coming back. And that is really what a lot of industry in Europe, in particular Germany, is really built on, like you've seen, say, for example, the production of, say, the German petrochemical industry has really just fallen off a cliff because it's very gas intensive, it's very energy intensive And unless you have access to that cheap and plentiful Russian gas, it's just not as viable as it was before. And I think it really just somewhat exposes the German economy's weaknesses for what it is.

Speaker 3: 38:57

Because I mean, you know for what?

Speaker 3: 38:59

prior to the Euro, the German economy was often called the sick man of Europe, because they had the strong mark which really made their exports uncompetitive in relative terms.

Speaker 3: 39:09

And then, you know, they had the Euro come in, they had a bunch of you know Southern European countries borrow a bunch of money you know the pigs and that helped drive down the Euro and make their exports more competitive. And you know now we're sort of seeing that come full circle where it's. You know Southern Europe, places you know like, like Spain, which are performing, you know quite well, at least in headline GDP terms, whereas Germany is performing very poorly. So you know, i think we're going to see a bifurcation of outcomes in that regard. But at the end of the day, you know the EU is something that runs on fiscal transfers from the stronger states like France, like Germany, and if they continue to be in the doldrums, then well things, that things are not going to go well for the rest of them in the longer term you have been doing work on financial markets and global economy for some time And sometimes things make sense and sometimes things that you think make sense don't make sense and just totally different outcome.

Speaker 2: 40:07

Is there anything that you've observed which kind of shocked you in the way it played out, with the narrative saying one thing but the reality saying other?

Speaker 3: 40:16

Well, if I was going to say something that shocked me, it would be the continued strengths of select housing markets. To be honest, because we've seen, you know, say, for example, we've seen it in certain parts of Canada, in Australia, even, you know, even Germany, sweden in certain places, and I didn't see that coming. And you know, i'll put my hand up and say I didn't see it. And it's just, it's fascinating the way that different demographic forces and different changes to consumer psychology are feeding into all of this. Because you'd look at it and you'd think, well, the largest relative rise in interest rates in history, with the largest debt load in history, well, this is going to end pretty badly for the house, for these housing markets.

Speaker 3: 40:56

I still believe in the long term it probably will, but in the short term, you know, say, for example, here in Australia, we've seen, you know, housing prices take off in some locales and it's just been, it's been really something to watch, particularly given the fact that you know you look at the backdrop of, say, for example, consumer sentiment well, that's collapsed, recession levels.

Speaker 3: 41:16

Yet it's somehow all just, you know, people are just sailing on by and thinking everything is fine. I just think that disconnect in terms of psychology, is really profound. And just on that particular topic, in terms of something that's really been interesting, is that the theory, this entire you know pretty much, you know since always, is that people getting older is, you know, a deflationary factor. But I'm beginning to wonder if this whole COVID thing and just the change to psychology of you know, yolo, you only live once and you've got to, you know, live while you're alive, for, you know, while you're out of lockdown, etc. Has changed things and has, you know, altered the way that economies are going to function, the way the demographics function going forward. And that's something I'd be curious to hear your thoughts on.

Speaker 2: 42:04

You know I tend to be more of a secular, very long-term deflationist just my own thinking. But I always go back to you know, the real disinflationary, deflationary forces are widening wealth gap, because Zuckerberg doesn't need two airplanes. So widening wealth gap, i'd argue, is disinflationary. Demographics, to your point, are disinflationary, deflationary. And then technology is disinflationary, deflationary. Now, to your point, the narrative on the demographic side changed so dramatically post-COVID. It went from demographics are deflationary to demographics are actually inflationary because there's less workers. But now you've got the AI dynamic and everyone's saying that AI is going to replace the need to hire more people. So I always go back to my default that narrative follows price. I don't believe the argument that demographics are inflationary only because of the last three years, when Japan is shown that's not the case. China is showing that's not the case. Maybe it isn't the case, but I don't think the cause and effect is there.

Speaker 3: 43:04

Personally, No, that's interesting And you write a good point. I mean, you know, obviously China and Japan are interesting examples, although I think there's a definite cultural disconnect there, because if you look at the savings rates of the Japanese or of the Chinese, they're obviously a lot higher than they are here in the West, and I don't know. I think the question is that we have to say, for example, here in Australia, the largest gross in terms of real consumer spending is occurring amongst those aged 55 and over, and that is a new thing here. That's something that's been going on since 2007-2008. Like, i'll give you an example In 2007, spending for those under the age of 25 and 34 peaked. For people under 25, it peaked in 2008 in real terms.

Speaker 3: 43:57

So the Australian economy has very much been driven by boomers, by changes to their spending habits, as they spend increasingly more and more. Now, while that spending is still below those people of working age, it is catching up And I wonder if that is something that's unique to Australia, in the sense that, basically, older Australians are generally an aggregate exceedingly wealthy because of the value of their properties and also the fact of compulsory superannuation here in Australia. So I just wonder is that something that is unique to us, where we are seeing this boomer-powered economy, where they're the ones like, say, for example, the latest data shows the only gross in terms of age demographics, in terms of spending, is among those who are 55 and over, whereas those who are under it's going backwards. So I wonder if we're unique or if that's something that could perhaps show up in other economies.

Speaker 2: 44:57

Yeah, and I will say I think it's less about. it's important to your point about the perception of death, right? So I might help me with an argument coming out of COVID that we're going to have a very high inflationary period. surely, from the standpoint that if you are afraid that you're going to die next week which people think like that in the midst of the COVID lockdown you might as well spend now to your point. just you'll low, fuck it right. You don't know how long you're going to live, so you might as well spend it and enjoy. And that sort of reminder of death is inherently inflationary.

Speaker 2: 45:26

Now, historically, the reminder of death also called the BB boom, which you're not having, which I think makes this also kind of interesting from a longer term population demographic standpoint. But you know, presumably the longer that you know, the further out you in time you get away from COVID and that feeling that we all dramatically had, you know, the more people get reminded with to the reality that, well, sure, if they spend now and they're still going to live to an average age of 74, 75, they still have to have money to live, right? So I I, to me it's more a short term effect of the thought that life was so transitory that you've got to spend now at some point. that ends up, i think, moving past people's minds.

Speaker 3: 46:07

Yeah, i think there's, you know, a fairly high probability that you're right on that. I mean, you know, humans tend to revert to the way we were. I mean, like I remember, when you know they first shut down New York City and everyone's, you know, the consensus swiftly became, you know, the city is dead, you know no one's ever going to go back there. And I remember thinking at the time well, you know, people went back to the city after the black plague And this is not the black plague, so I'm fairly certain they'll eventually go back to the city And that's, you know, that's exactly what's happened. So I think you know, with enough time, you know, things will eventually revert back to the way that they were.

Speaker 3: 46:40

But I do wonder how long that's going to take and under what conditions that's going to occur. I mean, i wonder, you know, to what degree could this type of, you know, psychological change perhaps survive a recession? And you know the potential implications for that? No, i mean, i think you know, say, for example, here in Australia, it's very much survived, you know, this big downturn in consumer spending and confidence, but well, that's not a recession. So it's going to be interesting to see exactly, you know, what this psychological change can live through before it's changed either by just the passage of time or the drive of necessity.

Speaker 2: 47:14

Tarek, for those that want to read some more of your commentary and thoughts on anything and everything, where can they turn to?

Speaker 3: 47:19

Well, they can. Naturally they can find me here on Twitter. I'm here far too much for some people's liking And also I have a sub stack at avidcomsubstackcom. And that's the long and short of it.

Speaker 2: 47:31

Yeah, see you. Good place to wrap this Twitter space up again. Everybody, please make sure you follow Tarek Brooker. Thank you, tarek, really appreciate it.

Speaker 3: 47:37

And I'll see you guys next time. Bye.