Will the Budget be the Catalyst for The Biggest Cycle in History? 

29th of September, 2020

Something BIG happened last week, or at least it was the start of something big that may take a while to play out.

We know the outcome. It’s just a matter of time.

On October 6^th the Federal Government; Scomo and his mates, will hand down the 2020/21 Budget and last week they started softening us up for what is coming.

It was a well-orchestrated repositioning of what the current Liberal Party will stand for. Quite simply. Don’t worry about the deficit, it’s all about jobs and economic stimulation!

Last year Scomo and the team were crowing about the expected $7.1B surplus we could expect, but that was before the ‘Virus” hit and the world collectively went to hell in a handbasket.

Now we can expect a bigger turnaround than the 1970 AFL Grand Final where Carlton came back from a 44 point deficit to beat Collingwood, only this time the Aussie economy will reverse a $7.1B surplus to an expected $85B deficit….

But to hell with the money, the government has made it clear they want Jobs! They want Growth! Everything and anything that could help the recovery is on the table.

Does Anyone Remember the Banking Royal Commission?

From December 2017 until February 2019 the Australian banking sector had to air its dirty laundry. It wasn’t pretty and at the time Commissioner Haynes was out for blood. Seventy six recommendations were handed down and to help appease the voter base, the government was adamant that “all seventy six recommendations would be adopted and implemented”.

As part of these findings, amongst other things, it was again reiterated to the banks that they would have to continue to adhere to their barbaric responsible lending obligations. Oh my!

This requires that the banks take responsibility and rigorously assess the borrower’s capacity to repay the funds they are seeking to borrow and only lend in a responsible manner.

The banks were outraged because Obama, like Australia, had brought in similar requirements for the US banks years ago, but the “Bankers President Trump” had long repealed this noxious legislation.

At the time we continued to say that such a reaction to curtail the credit growth of banks after an end of cycle bust was just natural and very typical of the behaviour that previous cycles have shown. In fact, in Episode 1 of my Podcast “Property, Australia’s Favourite Obsession” (PAFO) when I spoke with James Pledge a valuation expert from Knight Frank Valuations with over twenty years’ experience, he said

“My observation of the banks behaviours during the boom bust cycle is that they generally haven’t got it right and I’m not being critical, its just how the cycles seem to roll through large organisations.

So, at the top of the market where everybody’s going gangbusters, sales tends to override credit, exactly when credit should actually be overriding sales. And at the bottom of the market where the risk of further falls and the risk to the banks is probably at its least, credit gets hold of the bank and “we’re not lending” and “we are looking at things a lot deeper than we might at the top of the market”

And if you think that through its the complete opposite of what should be happening.” – James Pledge

Haven’t we seen this somewhere before?

It is all part of the cycle. We have seen it all before because Credit is embedded into one of our 5 Drivers. We know that the credit cycle is not just about the expansion and contraction of money but also the ease with which lenders assess and provide credit to borrowers. This will continually ebb and flow throughout the cycle.

At the bottom of the cycle credit is difficult to obtain. Banks want to ensure that their balance sheets are robust enough to withstand any potential run on funds. At the top of the cycle when asset prices have been skyrocketing banks will be giving away more money than borrowers want!

Well Josh just ensured that the 2nd half of the cycle like clockwork will occur.

On Friday Australia’s favourite treasurer Josh Frydenberg made sure our battered Aussie bank executives had a fantastic weekend when he announced the dumping of the decade-long and recently reinforced responsible lending requirements. This is music to the banks’ profits!

“This is not about the banks, it’s about the consumer,” Josh Frydenberg

Reserve Bank Governor Philip Lowe agreed saying a system where “if a borrower can’t repay the loan, it’s always the bank’s fault” was untenable.

Mike Felton Head of the Mortgage and Finance Association of Australia felt that “these changes will result in faster turnaround times for qualified borrowers removing onerous processes which should lower the cost of lending and borrowing money,”

Ken Morrison, chief executive, Property Council of Australia continued to show his independence when he contributed “A competitive and well-functioning credit market, subject to prudent regulatory oversight, will help more Australians buy or invest in property, improving housing supply and affordability and support jobs and economic growth”.

Its good to see that all the vested interests are now in unison and happy. 😊

With the onset of the Government Open Banking regime coming into play what will be very interesting to watch will be the technology response. We can envisage that technology will become a key differentiator between lending institutions carving a wide cavern between those who have embraced technology and those still using paper-based applications.

The intention of all this is to stimulate the economy. To stimulate credit. But we all know it will stimulate asset prices.

The shift from “lender beware” to “borrower beware” is exactly what the Calnan Flack Economic Cycle Action Plan (ECAP) tells us to be on the lookout for.

Point 4 of the Economic Cycle Action Plan 

In 2014 Ian Flack and myself developed the Economic Cycle Action Plan as a way to visually display not only just the cycle, but also provide some guidance as to what action we should be taking and what we could expect in the future. We wrote in 2014 at point 4 that at the Mid-Cycle Slowdown you should consider taking advantage of easy credit opportunities to continue to build your real estate and share portfolios.

How did we know that Josh would remove the responsible lending requirement vastly improving Australians access to credit? Well, we didn’t, but we did know that the cycle will always find a way of perpetuating.

Same Same, but Different.

Since the Calnan Flack 2013 November Forecasting Conference we have been predicting lower interest rates. Now we are faced with an economic crisis and rates are so low, it’s unlikely that the RBA will rely on just cuts to stimulate the economy. During the GFC the RBA cut rates 4.25% which was estimated to provide over $100B of stimulus. With rates at 0.25%, the likelihood of that happening again is negligible.

Is it any surprise that with the rate cut lever jammed, stimulation via credit expansion, tax cuts and infrastructure spending becomes the focus?

The irony in all of this is that 12 months ago we were all wondering where all the credit for the second half of the cycle was going to be created? History tells us that each cycle is bigger than the previous, as asset prices rise higher than before and more credit is created than anyone could previously conceive.

Now the stage is set WORLDWIDE for a MASSIVE credit expansion for the second half of this cycle. With banks and governments of virtually all countries seeking to undertake unprecedented stimulus programs via good old-fashioned credit creation.

What about JobKeeper?

My thoughts are pretty clear with the governments JobKeeper support. It can’t go on not because the Government can’t afford it, but that they don’t want to continue to keep jobs that wont and can’t survive in the new economy.

Australia has not had a recession since we “had to have one” twenty seven years ago and its lucky we did as it ensured that we didn’t become a “Banana Republic” – instead we became the world’s quarry…

The point I am making is this is our opportunity as a nation to transition to a new economy with higher levels of automation, technology and hence productivity. The economy that emerges out of this health crisis will be very different to the one that went into it. It is what Keating was trying to say in ’91. Creative destruction, harsh, but an opportunity for the government that has a mandate to open their cheque book and spend to transition Australia into the booming second half of the cycle.

The alternative is the approach that Japan took after the 1990’s crash where rather than letting banks and business go bust they put them on permanent life support leading to “Zombie Banks” and an economy that continued to contract for the next twenty years ensuring they missed the entire next cycle.

The Cycle Continues

In each cycle we wonder how the drivers will manifest to continue to drive the cycle. Unfortunately, despite the way our human brains work and future projects are presented to us the cycle does not operate in a linear manner.

The drivers can take some time to manifest into price advancements, but we do know that as they are currently unravelling, they must.

We have said all along that while this crisis remains a health crisis and NOT a credit crisis we will stimulate our way out of it. The Government is now making this a reality.

The news of the relaxation of the responsible lending requirements is BIG news because it was not that long ago that APRA was constricting the banks’ ability to create credit. We continued to state that this could not continue indefinitely.

The banks behaviour over the last 6 months or so during the Covid crisis has been exemplary. They have worked with the Government, regulators, and distressed borrowers to help ensure our property prices stay buoyant. Auction clearance rates and price movements generally are pointing to an exciting second half of the cycle for investors.

Now is a great time to review your lending solutions and get yourself ready to ride the BIGGEST CREDIT BOOM IN HISTORY!

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