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Deeper in Debt

Good morning! In a pre-Budget speech, Treasurer Josh Frydenberg said "the unemployment rate will now need to have a four in front of it", before he "pivots towards austerity".

Forget Back in Black, the theme of this year's federal budget will be Deeper in Debt. Fun times ahead (while it lasts). We have more analysis in the Econ Wrap below. 👇

Market Wrap

Spending like there's no tomorrow

Daily % change

AUD/USD

77.7

-0.3%

10Y Bond

1.68

1.4%

ASX200

7,082

0.2%

Brent (bbl)

68.5

2.2%

Gold (oz)

1,773

-0.5%

Iron ore (t)

187.8

0.3%

Bitcoin

53,214

-2.2%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract.

The US S&P500 (+0.68%) hit a new record high following another big Biden stimulus announcement, lower for longer interest rates and some solid earnings reports from Apple and Facebook (which we noted yesterday). The US also reported strong preliminary March quarter GDP numbers, growing at 6.4% on an annualised basis. Thanks to the $US1,400 stimmy cheques sent during the quarter, spending on durable goods (appliances and other long-lasting purchases) exploded by 41.4%. 🤯

Spending like there's no tomorrow: US President Joe Biden, in his '100 days as President' speech, announced another stimulus package worth $US1.8 trillion including universal pre-K, tuition-free community college, a federal paid leave program and an extension of cash payments for parents. Biden said the US needs to "make a once-in-a-generation investment in our families and our children", to counteract "autocrats – [who] think that democracy can't compete in the 21st century with autocracies, because it takes too long to get consensus". He was of course referring to China, as Biden believes China's President Xi Jinping wants his country to become "the most significant, consequential nation in the world".

Transitory inflation: No matter what inflation does in 2021, US Fed Chair Powell won't raise rates because he considers it "transitory". Good luck to him. 😬

More Big Tech earnings: After markets closed Amazon reported its best ever quarter in March, with sales rising 44%, beating Wall Street expectations by nearly 4%. Those stimmy cheques in action! Twitter was not so fortunate, underperforming in both revenue and 'monetisable' daily users expectations.


Econ Wrap

Deeper in Debt

The Budget is Back in Black no longer.
The Budget is Back in Black no longer. Liberal Party/Business Insider

Yesterday we warned about Australia's demographic time bomb and how "tough decisions [will] actually have to be made or standards of living will start to decline". The day before we wrote that higher iron ore prices have made it easier to pay off Australia's COVID-19 debt, "provided those 'second rate people' don't squander it all".

Alas, they seem intent on doing just that. According to Treasurer Josh Frydenberg:

"We were determined to avoid the high cost of prolonged unemployment from past recessions. In the 1980s recession the unemployment rate rose from around 5 per cent to over 10 per cent and took over eight years to recover. In the 1990s recession the story was the same – with unemployment rising from around 6 per cent to over 11 per cent and taking nearly 10 years to recover. In stark contrast, following this recession, we are on track for the unemployment rate to recover in around two years."

Not Your Father's Recession: The recessions of the 1980s and 1990s were nothing like the recession of 2020. Both previous recessions were structural in nature, with one caused by the 1970s (the energy crisis, soaring inflation, dismal productivity) and the other a deep financial crisis – the "recession we had to have" – caused by "the financial excesses of the 1980s".

It takes time to repair an economy after such events, given the large amount of resource misallocation (mistakes – e.g. investments in failed industries, people working for unviable companies) made in the several years prior.

Conversely, the recession of 2020 was caused by the temporary combination of voluntary and coercive restrictions on activity due to the global pandemic. Resources do not need to be reallocated to the same extent (perhaps fewer inner-city office buildings if work from home becomes a lasting trend), meaning a heavy-handed government and central bank stimulus response risks overheating the economy and repeating the mistakes made in the 1970s and 1980s.


The Wrap Up

  • Another 787-sized loophole – You can still travel to Australia from India, restriction free, via Doha with Qatar Airways. So much for the travel ban.
  • Two men died in NSW after they received the AstraZeneca vaccine, one aged 55 and the other in his 70s. Australia's drug regulator is still investigating.
  • Google is saving over $US1 billion a year due to reduced "company promotions, travel and entertainment".
  • Amazon will give pay rises ranging from 50 US cents to $US3 an hour for most of its workers. Amazon is a huge employer, hiring 500,000 new workers in 2020 alone.
  • Apple again warned of supply shortages affecting the Mac and iPad lineups, which will start to affect production in the next quarter.
  • US President Joe Biden told a lot of fibs in his first 100 days as President speech. The BBC fact checked it.
  • Moderna is boosting manufacturing capacity for its COVID-19 vaccine and expects to be able to make 800 million to 1 billion doses in 2021, then 3 billion in 2022. 🙌✈
  • Rugby Australia reported a $A27.1 million loss in 2020, with new chairman Hamish McLennan lamenting $A31.2 million in unnecessary spending by previous administrations.
  • Trade war or chip shortage? – Taiwan banned recruitment companies from showing job listings in China, because "China has become more aggressive in poaching and targeting top Taiwanese chip talent to help build a self-sufficient supply chain".
  • Australian tech unicorn Atlassian announced that its global staff of 5,700 will be allowed to work from anywhere in the world, so long as they spend a minimum of 4 days in the office per year.

Deeper in Debt was brought to you by Justin Pyvis. Forwarded this issue? Click here to subscribe.