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Switzer’s predictions for 2018

By Peter Switzer

It’s been another depressing week for depressant doomsday merchants trapped between their own one-eyed negativity and their long-lasting bad calls, which pose the question: what world do these people live in?

The doomsday merchants

There are a small but vocal group of economists, fund managers and last week, a CEO of a listed company (who decided to play economist and quite badly I might add), who warn us about Chinese debt, world debt, Chinese ghost towns, Grexit, Brexit, the bond market and, of course, Australia’s housing collapse.

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Housing bubble?

Legendary US investor and co-founder of global investment management firm GMO, Jeremy Grantham called out Australia as being a housing bubble in, wait for it, 2010!

The Australian newspaper reported his observations this way: He said… “that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend. You cannot possibly miss it.”

He’s forever blowing bubbles

If you’d listened to him in 2013, when he was still warning of bubbles, toil and troubles, you would’ve missed one of the greatest surges in house prices in Sydney and Melbourne ever!

It’s one thing to find something to worry about but it’s another thing to warn too early. Sure, you might get it right listening to these early call doomsday merchants but your potential loss could be less than the gain you would’ve made if you’d ignored them.

No need to be negative now

Be sure on this: bad news will arrive one day — it always does — but my optimistic stance has been right since March 2009, when stocks threw off the GFC clobbering. So here I go again looking at the reasons why I’m positive on the Oz economy for 2018.

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Switzer big ticks

This is what I like about our economic story:

  • Economic growth is tipped to head to 3% +.
  • Unemployment is 5.4% and falling — a 9-year low.
  • Employment is up 13 months straight and the best growth in 12 years!
  • CommSec: “Business borrowing is surging!”
  • Overall lending is at a 7-month high!
  • Business conditions are at a decade high! Business profits are at a record high!
  • Business confidence is up from 8.4 to 11.7 (Long term average is 5.9)!
  • Monthly consumer confidence is improving but not really positive yet.
  • ANZ’s weekly consumer confidence is at a 16-week high.
  • Construction soared 15% in the September quarter. Engineering surged 33% in the September quarter.
  • Occupied seats on domestic airlines are at a 5½-year high of 78.4%.
  • CBA’s Business Sales Indicator was the strongest in five months.
  • The number of loans for new home purchases is at a 38-year high!
  • Annual wage growth is 1.9% and underlying inflation is 1.8%.
  • Economists are predicting wage rises to improve next year.
  • Reuters headline: “RBA’s DeBelle says Australia business investment is picking up.”
  • The Budget deficit is falling quicker than expected because of a lot of the good news above.

Good tidings to all

And the good tidings kept rolling over the week, with Senator John McCain getting on board the Trump tax cuts, which sent the Dow Jones over 300-points higher. Adding to the positivity was an agreement amongst oil producers to keep supply controlled so as to avoid a collapse in oil prices. The recent pattern has been that if oil prices dive, they take stock markets along for the ride.

More good news

We also learnt this week that dwelling approvals have been up nine months straight and townhouse approvals are at a 20-year high!

Chinese manufacturing data surprised on the high side and local business investment readings were the most positive in 12 years!

Wall Street approved

Meanwhile, Wall Street liked the new appointee to replace the Fed boss, Janet Yellen. Jerome Powell will take the most powerful monetary policy job in the world next February but his safe pair of hands and his likely more relaxed attitude to controls on banks excited the stock market.

Back here in Oz

At home, the ANZ weekly consumer confidence figure fell 1.2% to 115 but that was from four-year high levels.

Clearly, there are some negatives out there but they’re totally swamped by the positives. But what about the China debt syndrome?

China cruising

This week on my TV show I interviewed both AMP Capital’s Dr. Shane Oliver and BIS Oxford Economics’ Sarah Hunter and both economists pointed to the high saving rate in China and how the big debt-to-GDP of 200% is owed to Chinese savers, not foreigners, so it’s less of a problem.

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Melbourne/Sydney house prices

And even Louis Christopher of SQM research, who has been one of this country’s best property price predictors, thinks we could see a comeback for house prices next year, even in Sydney and Melbourne because interest rates are not expected to rise any time soon and banks are becoming easier with their lending criteria. That said, he made that call before a Royal Commission into banking was announced!

Don’t worry, be optimistic

All up the evidence above builds a case for optimists in 2018 and reinforcing my argument is Macquarie Bank, which this week tipped stocks would rise by 9%, before dividends, next year. This implies about a 13% gain and they wouldn’t be making this call if they expected an Armageddon event to rain on their parade.

Go optimism in 2018.

Peter Switzer is the founder of the Switzer Report, a newsletter and website for self-managed super funds.