Stock markets fall, investors get jittery – is the debt-fueled finance party over? | Australian economy

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Financial news began to turn negative, both at home and abroad.

Is the debt-fueled party that has brought solace amid the pandemic along with jobs and rising asset prices for millions, if not billions, about to end?

There are certainly short-term problems, but the biggest and most serious threats are geopolitical and difficult to predict – including the next stage of the Covid pandemic – or of our own making.

Here is a non-exhaustive list of the economic challenges we face.

Gathering of Storms

First, Omicron has been around for over a month, but the most contagious variant of Covid hasn’t – so far – derailed the financial markets.

Of course, there is massive absenteeism of infected or close-contact staff, upending supply chains in Australia where many companies have begun to raise fears of running out of money. And, globally, companies are scrambling to secure inputs for everything from cars to fertilizers.

Financial media on Monday warned of market turmoil as the binary world of bettors is seemingly shifting from “active risk” to “anti-risk”.

US stocks fell more than 5% last week, which would be the worst performance since Covid got serious in March 2020. The famously tech-heavy Nasdaq was around 14% lighter since the start of this year .

But a bigger plonk, however, comes from the cryptic world of cryptocurrency. The Washington Post over the weekend, the estimated digital tokens had “vaporized” $1.4 billion (nearly A$2 billion) in just two months, as the value of the ethereal market halved.

When the Australian stock market opened on Monday, shares duly plunged around 1%. At the end of the game, however, the losses were a more modest 0.5% – not a savage by any measure.

Another tumultuous day lies ahead, however, with Australian equity futures set to open lower on Tuesday after wild mood swings on Wall Street. Europe’s STOXX 600 index fell 3.8% earlier – its worst day since June 2020.

Inflationary threat

Investors have reason to prepare for a big week in financial markets.

The big issue is inflation with countries like Britain and the United States recording their fastest price spikes in decades, and the US Federal Reserve meeting for two days this week to signal whether rates higher interest rates arrive earlier than expected.

Those with adjustable rate mortgages know that having to pay more on a loan usually discourages purchases of everything else.

Wealth sentiment also takes a hit if others become less willing to borrow as much for property, negating the chance of repeating last year’s 25% rise in average Australian ‘house values’, per example.

For Australia, the next glimpse of inflationary pressures lands on Tuesday, when ABS releases consumer price figures for December quarter.

The overall figure of around 3% will largely be ignored, with attention focused on the adjusted average – a gauge that weeds out the most transient thorny moves.

The expected rate of 2.4% will be the highest in more than seven years and will reignite fears that the Reserve Bank of Australia may act sooner than its first official rate hike scheduled for 2023-24.

Westpac last week advanced its advice for the RBA’s first move in August, a move that gained credibility after another strong month of recruiting – at least before the Omicron disruptions began.

Weathering the Supply Storm

Analysts like Nathan Roost, a logistics expert at consultancy Ernst and Young, estimate we have about six weeks of supply shortages to overcome.

A lesson learned, he says, is that we need investments not only in highly efficient and just-in-time supply networks, but also in a more resilient workforce.

Even so, “there is this pent-up demand for a lot of things, services, goods, travel” which will remain an underlying driver of the Australian economy for the next six to nine months.

“There is clearly a shock in the short term, but I think longer term the economic momentum will remain somewhat positive,” Roost said.

The OECD too expects growth this year to be a solid 4.5%, down from 5.6% in 2021, but rosier than the 3.2% projected for 2023 as Covid-related stimulus packages run out.

‘Motel Roach’

Other economists, however, offer a less optimistic view.

Stephen Anthony, a former Australian treasury official and now chief economist at consultancy Macroeconomics Advisory, says central banks have lost credibility and distorted economies by becoming massive investors in economies.

Major central banks have embarked on an asset-buying spree to prop up – but also distort – economies, with Australia recently joining, said economist Stephen Anthony.

The RBA, for example, bought up Australia’s, mostly federal, debt at the rate of $4 billion a week to drive down bond prices and thereby lower the cost of borrowing to stimulate economic activity. Debt holdings exceed $330 billion, and the bank “owns a third of the yield curve,” Anthony says.

In a recent article published by Australian National University Agenda newspaper, Anthony argued that the RBA was a latecomer to so-called quantitative easing, but had done much to close the gap with its counterparts in the United States, Japan, Europe and elsewhere.

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All that easy money has had a “pretty profound effect” in inflating the prices of homes, stocks and other assets here and around the world, he said.

“Markets get nervous because they know there is a contradiction in these policies,” he says. “What will happen in the next market rout if a major central bank such as the Fed has to choose between supporting financial markets and/or keeping inflation lower?”

As the song Hotel California puts it, central banks find out that “you can check in but you can never leave,” says Anthony. “And once you do, you have a cockroach motel. It’s something you just can’t get rid of.”

In other words, the withdrawal of support would likely trigger a market sell-off by investors that would bring back that same central bank frenzy to avoid an economic meltdown.

Debt trap, geopolitics and climate

Satyajit Das, another independent economist, warns of similar excesses and limited options for Australian leaders in his latest book, The madman of fortune, slated for publication by Monash University in March.

“Policymakers are lean,” says Das, adding that government and central bank confidence, shaken by the global financial crisis and subsequent super-bubbles, has been further diminished in the current Covid crisis.

“If they had reorganized their savings, if they had invested heavily where there’s a stream of income that’s going to amortize the debt on the other side, I’m very relaxed” about the debt accumulation, says -he.

“You can’t get financing by borrowing,” like they’ve been doing for 30 years, Das says. “That’s the problem they created and now they’re kind of trapped.”

Das says investors aren’t able to pick and choose geopolitical issues, though he doesn’t think a Russian invasion of Ukraine is likely to pose a big threat. On the one hand, the Russian Vladimir Putin will not want to disrupt the Winter Olympics in China organized by his companion Xi Jinping.

Another is the Pinsk Marsh, a giant bog covering much of the Ukrainian border that has pinned down other armies in the past, will soon begin to thaw as spring approaches, Das says.

Other surprises, however, could include China’s crackdown on its supply chains to stamp out Covid.

Another threat is not going away either: climate change.

“The other risk…is extreme weather events,” says Das. “They have huge costs, and they have huge disruptive values, and nobody seems to even talk about them anymore.”

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