1

The Looming Aussie

Recession and How
to Survive It

By Nick Hubble
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A Daily Reckoning Australia Exclusive Report:

The Looming Aussie Recession

and How to Survive It
Why Australia’s 28-year recession-free
miracle is ending…and three steps to
recession-proof your wealth
By Nick Hubble, Editor, The Daily Reckoning Australia

Dear Reader,

There’s little denying that Australia’s 28-year recession-free run is a remarkable

achievement. One made even more miraculous by the fact that it’s a world record.

Despite a long line of doomsday predictions calling for a recession since the mining
sector hit rock-bottom in 2015, our enviable record remains intact. Not only that, every
quarter brings with it a new milestone.

Yet this miracle run has had its share of near misses.

The relaxation of bank lending in the mid-1990s allowed Australians to take advantage
of the reinstatement of negative gearing in the final years of the Hawke government.

Meanwhile, Australia’s tiny tech sector was the only real casualty of the dotcom bust,
leaving the stock market and economy untroubled.

Following that, the Aussie construction boom that began in 2001 coincided with China’s
rise as an economic powerhouse…putting a rocket under Australia’s iron ore export
sector.

Then, in 2008, we dodged the global financial crisis when China once again came to
our rescue, buying up Aussie resources by the boatload.

And most recently, in 2015, we rode out the mining downturn to avoid a recession
despite a slump in economic activity. Yet this time there was no knight in shining
armour. We only managed this by taking on more debt and running down reserves.

All told, like a sprightly cat that weaves its way through any obstacle, it feels as if the
Aussie economy has nine lives.

And why not?

Why can’t this economic miracle continue for years to come?

In truth, we might bungle our way to another few quarters of growth. Or we may even
skirt the edges of recession by bouncing between negative and positive growth.

As you know, a technical recession is two quarters of declining growth. Which means
 The Looming Aussie Recession and How to Survive It 2

the bean counters in government can always pull rabbits out of a hat to avoid the
likelihood of a recession.

But no economy in history has avoided recession indefinitely. It is inevitable, in every

economy, country and market. And the longer it’s postponed, the harder it’ll hit
when it arrives.

The Australian economy will be no exception to this rule.

As this timely and critical report reveals, there are now three signals in the economy
flashing red that indicate a recession is coming to Australia soon.

No, it won’t mean that we’ll be scrounging bins for food when it arrives. But failure to
prepare for its landing now, is not only prudent, but right. Not only to your wealth and
retirement plans, but for this once-in-a-generation opportunity to buy up cheap assets
as market panic sets in.

Yet before we explain the best course of action to help recession-proof your future, we
need to start at the beginning.

And no discussion on an Australian recession can begin without first looking at the
nation’s Gross Domestic Product (GDP).

Australian GDP: Lies, damned lies, and statistics

Data dumps were giving us good news.

Take this for example…

In May 2017, the Australian Bureau of Statistics revealed that Australia enjoyed a 1%
increase in GDP for the first quarter ending March.

That gave us an annual GDP growth of 3.1% at the time.

At face value, this was another outstanding performance by the miracle economy. Not
least because so many other developed economies struggle to rise above 2% growth.

Unsurprisingly, Australia’s resurgent mining sector helped boost growth. In fact, rising
mining exports accounted for almost half the GDP increase at the time.

Almost equal to this was government spending. Infrastructure and healthcare spending
once again came out as big contributors to growth.

Meanwhile, the rollout of the National Disability Insurance Scheme (NDIS) lived up
to its reputation as the gift that keeps on giving. The rollout was responsible for some
150,000 new jobs created in 2017.

Nine months later, the data tells a very different story…

GDP for all of 2018 dropped to 2.3%.

Meaning overall economic growth is falling.

Worse still, is the fact that Australia entered a ‘per capita recession’. That’s where
economic growth per person is negative for two quarters in a row.

Our standard of living is going backwards.

In other words, productivity per person is falling.

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At an individual level we are spending less on the things that make the economy grow.
Turns out, we are spending our cash on the essential stuff. Not the things we want to
buy or do.

Government spending and commodity values may have propped up growth last year.

But that can only stretch so far.

The rest of the Aussie economy, relies on you and me…

Three reasons a recession in

Australia is inevitable
Despite the noise about resource exports, around 60% of Australia’s GDP comes
from consumption.

The problem with this is that consumption continues to fall in Australia

This sector reveals the poor state of financial confidence in the economy, which serves
as a starting point for why a recession is not only possible…but probable.

Though it’s only one indicator, consumption directly feeds into the other three signals
heralding a recession.

In other words, this worrying lack of consumption growth is attributed to three key factors:

1) Rising costs of living;

2) Lack of wages growth; and
3) Growing debt levels.

Between 2010 and 2018, Aussies were spending on average 1.6% more on housing
costs and an extra 0.3% on energy and fuel. Meanwhile, medical and healthcare costs
have risen 0.3% in that time.

That amounts to a total 2.0% essential expenditure increase.

This wouldn’t be too concerning were it not for the fact that this increase pips
Australia’s measly 2.3% wages growth.

Compounding rising costs and lack of wage increases is growing levels of consumer debt.

In 2018, total household debt sat at $2.9 trillion, with roughly $1.8 trillion of that tied up
in mortgages.

The average household debt-to-disposable income ratio in Australia is almost 200%.

That makes Australia the second most indebted nation per capita.

You’ll see why this matters so much shortly, but let’s stick with consumption for the moment.

Of consumption growth figure, the only increases came from non-discretionary items.
That includes essential everyday items like financial services, food, electricity, gas and
other fuels.

For the year overall, items like clothing and footwear dropped a little, some 0.1%. But
leisure activities, such as eating smashed avo in fancy hotels slid a massive 0.7%
for 2018.

So, Aussies are spending less of their discretionary income on the very things that
make our economy tick.
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That’s a problem because it leaves some 1.2 million retail jobs at risk, or 11% of the
entire workforce. And that’s without even factoring in the 800,000 or so hospitality workers.

All this leaves us with a simple and alarming equation…

Lacklustre consumption + rising living costs + lack of wages growth + rising

debt = recession.

All told, it places the Aussie economy in a tricky position. After all, we are consumerists
by and large. If people aren’t buying things, the nation is likelier to go broke and flirt
with recession.

But have we reached that point already?

Most Australians are broke

Part of the reason we may not be buying as much these days is because most Aussies
are already broke.

Take a look…

Australia household savings ratios

Source: Trading Economics; Australian Bureau of Statistics

As you can see, the household savings ratio (savings to income) sits at 2.3%, down
from 8% only two years ago.

That means not only are our wages barely keeping up with rising costs but, after the
bills have been paid, there’s nothing left over to put in the savings account.

In 2018, Reserve Bank of Australia Assistant Governor Michele Bullock declared that
there were ‘pockets’ of financial stress in the economy: ‘The overall level of stress
among mortgages households remains relatively low’.

I disagree. Let me show you why…

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Source: Reserve Bank of Australia

Somewhere between 10–20% of Aussie households have shown some degree of

financial distress since 2011.
What concerns me most, however, is that the chart shows around 5% of Australian
households have been consistently experiencing financial difficultly (at least three
difficulties) since 2012.
Since data for 2016 was only provided at the start of 2018 — and hasn’t been updated
publicly — it’s already old and out of date.
Odds are that more households are facing financial hardship today.
Here’s another chart showing the extent to which Australians are struggling. It shows
the banks’ non-performing housing loans.

Source: Reserve Bank of Australia

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Today, non-performing loans are below the high of 0.9% seen during the 2008
financial crisis.

However, they’ve begun climbing again in the past two years.

Again, we find financial distress nearing the previous peak.

But the real issue isn’t the 1% shown on the chart. It’s what it doesn’t show that’s
the problem.

You see, the data the banks provide to the market refers to debts past 90 days due.

Once an account is three months behind on payments, it becomes a ‘bad’ or ‘doubtful’

debt. And it must be reported.

But, up until this point, banks can manage the debt in-house.

It’s within the banks’ own collections and financial hardship teams that they can
manage customers who are falling behind. And it is here that the bargaining begins in
earnest — half-repayments only a month or two behind with some ad hoc payments
along the way helps keep the banks from reporting bad and doubtful debts.

This is where the real problem lies, and why I think the Aussie economy is hurtling
towards a recession.

Lenders and consumers are helping each other paper over the cracks to create the
appearance of financial wellbeing.

But this can’t go on forever.

On top of this, there’s a growing realisation of just how much damage even the smallest
rate rise will inflict on households.

Research firm Digital Finance Analytics (DFA) says that the number of Australian
households on the ‘financial edge’ is rising fast.

In November 2017, Martin North, an analyst at DFA, claimed that 910,000 households
were susceptible to any increase in their mortgage repayments.

18 months later that figure stood at 1.1 million households. That’s a 20% jump

To put that into perspective, that’s 11% of the total Australian housing stock which
would struggle dealing with a negligible interest rate increase.

What’s more, the people most at risk are owner-occupiers, and not investors.

Owner-occupiers are Australia’s most vulnerable households because, unlike investors,

they live in their homes.

Not only are these households struggling and at higher risk of default, their troubles
are partly the reason why we’re hurtling towards a recession because they’re having to
tighten their belts to make ends meet.

So just how worried should we be about this debt problem?

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What the banks don’t tell you about debt

Statistics say that bad debts, at less than 1%, aren’t a problem.

The reality is very different.

Banks would much rather keep debt-related information in-house and limit the potential
losses. After all, it’s better to have a customer pay off half a repayment than write a
debt off.

So banks prefer to work with debtors than let them default.

But this information isn’t made public — it’s an internal memo of sorts. One few people
are privy to.

This is why a bank’s non-performing loans don’t look bad — the data isn’t showing the
true number of people in a position where they may potentially default.

Internalising the arrears within a bank prevents you from being able to see just how
financially weak the average household is in Australia.

In reality, financial distress data simply doesn’t match up with the weak wage growth,
higher living costs and the poor savings rate.

What we get instead is a bunch of rubbery numbers pretending everything is OK.

On paper, the Aussie consumer appears as if they can survive the financial distress
they’re experiencing. In reality, they simply aren’t buying as much as they did before,
and for good reason — they can’t afford to.

What we don’t know is just how far behind they are on repayments of things like car
loans and credit cards.

If we found out what the true arrears figure were, we’d probably discover that far more
than 1% of Australians are in severe financial distress. A statistic that would paint a
more sobering picture of the Australian economy and its ‘miracle’ recession-free run.

How to recession-proof your

wealth in three steps
Shielding yourself and your family’s wealth from financial crises is never straightforward
or guaranteed. But there are certain steps you can take to put yourself in the best
position possible to weather the effects of a recession.

Below are the three most important steps I believe you need to take today to safeguard
your wealth ahead of an impending Australian recession, while positioning yourself to
take advantage of the opportunities it could present.

And there’s only one place worth starting…

Step 1: Gold, silver and other precious metals

Gold and silver bullion is critical for wealth preservation.

Precious metals — and gold in particular — never lose their purchasing power.

In fact, the price of gold merely reflects the amount and value of any given currency
in circulation.
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For instance, in times of inflation or deflation, the gold price rises and falls. But not
because its intrinsic value increases. That never changes. It’s because the amount of
currency in the system fluctuates.

When people lose confidence in currencies, they almost always place their trust in
gold. This has happened time and again throughout history.

This is what makes precious metals in general the ideal investment for trying to
safeguard wealth…and the ultimate recession-proof asset to own.

Step 2: Cash
Despite the importance of precious metals in any portfolio, recessions aren’t
depressions, and they typically don’t lead to hyperinflation.

Where precious metals serve as a safeguard to wealth, cash allows you to take
advantage of the opportunities that arise when asset prices fall.

In times of panic selling in the market during recession, it’s important to have cash to
be able to swoop in and buy investments on the cheap.

What’s more, in order to free up cash reserves, it helps to be debt free. Look to pay
down any credit card debt in particular, as this will free up much-needed capital to
spend when the right opportunities come up.

Step 3: Get out of these stocks

Having cash to spend in the market is important in times of recession.

But that doesn’t mean you should just buy any old stock.

In fact, you’ll want to avoid some of the most trusted and go-to blue chip stocks

The banking sector is heavily exposed to mortgage debt which, as you’ve seen, has left
many households under financial duress. Take a look (next page)…
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Source: ABC News

The chart shows the size of home loan books for each of the Big Four banks. At $1.35
trillion, the cumulative loan books are almost the size of Australia’s GDP.

With the rising number of Aussie households in financial stress — and a growing number
of them at risk of default — this is a potential ticking time bomb for Aussie banks.

No one in the mainstream is telling you to dump bank stocks. But if you want to
recession-proof your portfolio as best as possible, you may want to consider going
against what you’ve been told about the Aussie stock market.

Dumping bank shares is the first step.

***

If you follow these three steps in the coming months, I believe you’ll start to put yourself
in the best position possible to weather any downturn in the Aussie economy.

Rather than seeing a recession as something to be feared, you should view it as an

opportunity to build a better future for you and your family.

The world won’t end, and neither will your opportunity to create a lasting financial legacy.

But you need to be wary that a recession is on the cards in Australia’s future. And you
should not waste any time in taking action to prepare yourself for when it eventually arrives.

Welcome to The Daily Reckoning Australia

The future of the Australian economy and its place in the global financial system
is what macroeconomic strategist Jim Rickards and I track every day in The Daily
Reckoning Australia.
 The Looming Aussie Recession and How to Survive It 10

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We’re glad to have you on board.

Kind regards,

Nick Hubble,
Editor, The Daily Reckoning Australia

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