Chasing the full employment dragon

Delivered on By Justin Pyvis

Good morning! Yesterday ScoMo declared the flooding in northern NSW a national emergency (although it will also cover QLD), the first time such a declaration has been made since the legislative power was created in 2020.

According to the ABC the “declaration gives the federal government power to deploy money and resources faster”, although it’s not clear exactly what that entails – ScoMo simply said it will help “cut through any red tape that might be faced”.

If only it were that easy. Earlier in the day the Australian Defence Force said that in terms of getting personnel out to flood damaged regions:

“…physically it wasn’t possible until Friday and Saturday, just three or four days ago. It’s an enormous logistics challenge to be able to get that kind of support to people on the ground when they need it.”

On a more positive note for those affected there were also several additional relief measures approved by the expenditure review committee, the sum of which will likely run over a billion dollars by what we can gather from the official announcement.

A shot of the northern NSW floods, courtesy of the NSW SES.
A shot of the northern NSW floods, courtesy of the NSW SES. Source

Reading the tea leaves

Daily % change

AUD/USD

73.3

+0.7%

AUD/CNY

4.63

+0.7%

AU Bond

2.32

+4.9%

US Bond

1.95

+4.1%

ASX200

7,053

+1.0%

S&P500

4,294

+3.0%

Brent (bbl)

112.1

-12.4%

Gold (oz)

1,998

-2.1%

Iron ore (t)

161.2

-2.6%

Bitcoin

42,096

+8.7%

Ethereum

2,712

+5.3%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing theΒ US S&P500Β was rallying strongly, up +2.97% after Ukrainian President Volodymyr Zelensky said he had “cooled down” about the prospect of Ukraine joining NATO and was willing to discuss the future of the country’s Russian-backed separatist regions, potentially offering Russian President a face-saving olive branch that could eventually lead to a peace treaty.

Crypto prices also jumped after US President Joe Biden signed an executive order calling “on federal agencies to take a unified approach to regulation and oversight of digital assets”.

Locally, theΒ ASX200 added +1.04% with all 11 sectors finishing in the black, led by tech (+3.2%) which recovered some of its recent losses.

It was a wild day for Nickel Mines which at one stage fell -23%, entered a trading halt, before recovering to finish down just -4.8%.

The rollercoaster of a ride was due to a bad bet by its part owner, stainless steel producer Tsingshan, which due to the previous day’s spike in commodity prices was forced to cover a short position of at least 100,000 tonnes of nickel, sending prices quite literally through the roof.

Investors were worried that Tsingshan’s losses could force it to sell its large stake in Nickel Mines – a concern that Tsingshan “firmly assured” the market that it had no intention of doing, triggering the partial recovery.


Food for thought

Philip Lowe should know that you don't ever catch the dragon.
Philip Lowe should know that you don't ever catch the dragon. Source

Reserve Bank of Australia (RBA) governor Philip Lowe delivered a speech yesterday covering topics including the Australian economy, the invasion of Ukraine by Russia, inflation, the “journey towards full employment” and, of course, the “implications of these developments for monetary policy”.

We’re not going to go through the whole 3,097 words in this space – feel free to check it out yourself – but we do want to touch on one aspect of it in particular: the “journey towards full employment”.

Lowe pulled from a copy of the 22 August 1963 Australian Financial Review to highlight the fact that even when Australia’s unemployment rate was just 2%, the RBA at the time claimed it was “still too high”. For context, today the rate is 4.2% and as recently as 2019 Philip Lowe estimated that full employment was “perhaps around 4.5%”.

Lowe then drew the following lesson:

“Reading the AFR from 1963 served as a reminder that what we consider as achievable changes over time, and is influenced by the structural features of our economy.”

He’s not wrong and that’s one reason why we’ve been so critical of the RBA lately (in order of recency see here, here, here, here, here, here and here): it has been consistently behind the curve in its setting of monetary policy, in both directions, due to hubris but also because its models – dependent as they are on historical data and relationships – are ill-suited for dynamic situations with rapid change, such as a global pandemic or European war.

But what concerns us most is that Lowe has drawn the wrong conclusion from the lesson. In chasing the full employment dragon – what he called “the opportunity to secure a lower rate of unemployment than has been the case for some decades” – Lowe risks overheating the Australian economy.

An overheated economy increases the risks of resource misallocation, the costs of which will be revealed when monetary policy (i.e. real interest rates) eventually starts to normalise. When that happens not only will the “opportunity” of full employment vanish entirely but it could also lead to a severe recession, putting far more people out of work than would have been the case had the RBA not pushed so hard to achieve “a lower unemployment rate than was thought possible just a short while ago”.


Chewing the fat


Bits and bytes

🚒 “Russian warship, go f**k yourself.” The ship that fired on a group of Ukrainian border guards on Snake Island was destroyed, “possibly by a missile fired by land-based Ukrainian forces defending the port city of Odessa”.

πŸ—³οΈ Australia’s Liberal Democrats will have to change their name after the High Court ruled in favour of the Liberal Party, which challenged the use of the word “Liberal”.

πŸ”Œ Analysts at Morgan Stanley wrote that Tuesday night’s move in the nickel price alone would increase the costs of making an electric vehicle by around $US1,000.

❌ Russian President Vladimir Putin signed a decree allowing his “government to impose restrictions on exports from and imports to Russia of products and raw materials in regards to particular countries, the list of which it can define later”.

πŸ₯ A maternity and children’s hospital in Mariupol, a Ukrainian city currently surrounded by Russian troops, was “completely destroyed” after a “direct strike”.

😟 Australian consumer confidence fell to its “weakest print since September 2020” in February, likely due to “war in Ukraine; the floods in south- east Queensland and Northern NSW; [and] ongoing concerns about inflation and higher interest rates”.

β˜• Starbucks said it will pause all business activity in Russia due to “the unprovoked, unjust and horrific attacks on Ukraine by Russia”.

πŸ“‰ Fitch Ratings downgraded Russia’s sovereign debt to ‘C’, implying “default is imminent”.

πŸ“ˆ Ratings agency S&P Global said the total debt of Australian states and territories will surpass $A500 billion this year. It warned that: “As interest rate liftoff looms, the property market faces some risk of correction. Any significant fall in transaction volumes or prices would hurt stamp duty collections, one of the states' main revenue lines.”

πŸ’Έ Within two years, the Australian federal government’s annual interest payments “are on track to go beyond $A22 billion and continue growing”. Total debt will pass $A1 trillion.

🍎 Apple released the “Mac Studio”, a very expensive computer that’s “built from a single aluminium extrusion… [providing] an extraordinary amount of performance”. It also released an expensive monitor with a short cable – but never fear, for $US129 you can upgrade it to 1.8m…

πŸ’΄ China’s consumer price index rose by 0.9% in February, unchanged from January. Producer prices – the prices received by factories in the wholesale market – remained elevated at 8.8%, down from 9.1% in January. However, the slowdown was largely “due to base effects. In month-on-month terms, prices rose 0.5%, the most since last October”, and the data do not include the recent surge in commodity prices.

🧠 A new study found that leaded gasoline may have stolen “a collective 824 million IQ points from over 170 million Americans alive today, more than half of the population of the United States”.

πŸ—³οΈ South Korea’s Yoon Suk-yeol of the conservative People Power Party has been elected as the country’s next President after he narrowly defeated the incumbent Democratic Party’s Lee Jae-myung.