Conflicting goals

Delivered on By Justin Pyvis

Good morning! Labor outlined its plan to fix housing on Sunday, unveiling a ‘Help to Buy’ scheme under which the government will contribute up to 40% the price towards a house for those with a taxable incomes of up to $90,000 for individuals and $120,000 for couples.

So we have a housing market where demand is strong and supply is restricted, forcing prices to rise and the solution is to… further subsidise demand and do nothing about supply.

If ‘Help to Buy’ sounds familiar that’s because it already exists in the UK. Here’s what a recent House of Lords report concluded about that scheme, which largely mirrors Labor’s plan except it’s capped at 20% of the price, requires a 5% deposit (rather than 2%) and is only for new builds:

“We find that the Government’s Help to Buy scheme, which will have cost around £29bn in cash terms by 2023, inflates prices by more than its subsidy value in areas where it is needed the most… This funding would be better spent on increasing housing supply.”

Eeesh. We can’t be too critical, though, as the Coalition’s Home Guarantee Scheme effectively works the same way (subsidises demand). But the real kicker is that if either scheme goes belly up due to, say, a recession and/or decline in house prices, the taxpayer is on the hook for it all.

It’s a good thing house prices always rise and recessions don’t happen anymore – what could possibly go wrong? 🤪

Reading the tea leaves

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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 plunged -3.63% on Friday, its biggest daily loss since June 2020. All 11 sectors fell, led by a 5.9% slide in consumer discretionary after Amazon tumbled -14.05% in its steepest one-day decline since 2006, with the company reporting a large loss due to soaring costs.

Friday’s decline means the S&P500 has now fallen -13% so far in 2022, the worst performance to start any year since 1939.

Locally, the ASX200 added 1.06% with all 11 sectors making gains, led by tech (+2.25%) following similar gains on Thursday night in the US after Meta reported above-expectations user growth in the March quarter.

However, it wasn’t enough to prevent the index falling (-0.51%) for the second straight week, led by losses to the materials (-1.14%) and energy (-1.04%) sectors.

Food for thought

China's manufacturing sector has been hit hard by its recent lockdowns.
China's manufacturing sector has been hit hard by its recent lockdowns. Source

The Chinese Communist Party appears set on continuing its pursuit of the “seemingly conflicting goals of achieving an economic growth rate of ‘around 5.5%’ for the year while also maintaining a zero-Covid policy that continues to have an outsized impact on the economy”:

“The top leadership vowed on Friday to speed up the implementation of existing tax-cut and supportive policies, as well as the use of new monetary policy tools and effective investment, while also refining regulatory policies, according to a statement following a quarterly economic meeting of the 25-member Politburo, the centre of power within the Communist Party headed by President Xi Jinping.

Specifically, the widely watched Politburo meeting said that leadership will actively respond to the concerns and appeals of foreign investors, which have been greatly affected by fresh waves of coronavirus outbreaks that began last month.

The meeting also showed signs that leaders may be keen on loosening their tight controls on internet firms and property developers.”

Markets liked the news, with the CSI300 index adding 2.43% on Friday ahead of a 3-day holiday, with the yuan also appreciating.

But having goals and executing them are separate tasks. It’s going to be very difficult for China to achieve say, GDP growth of 5.5%, without abandoning – or at the very least softening – its other goal of “dynamic zero-COVID”.

The Omicron variant spreads too easily to ever be eradicated and rolling lockdowns have already caused China’s economy to sputter. According to the latest public and private manufacturing Purchasing Managers' Indices, activity in April slumped to its lowest level since February 2020, with lockdowns causing “mounting economic pain, with the curbs snarling supply chains and leaving goods piling up at the world’s busiest container port” (see chart above).

We’re not sure how President Xi Jinping plans to resolve his conflicting goals. Perhaps he’ll end up playing on the choice of words – “dynamic” has a relatively loose definition – providing some wriggle room to ease restrictions while also claiming that it was part of his plan all along.

Chewing the fat

Bits and bytes

🗳️ The latest Newspoll showed Labor maintained its 53-47 lead over the Coalition on a two-party preferred basis. In terms of primary votes Labor improved two points to 38, with the Coalition unchanged on 36.

📣 He had to get the cash from somewhere: Elon Musk sold $US8.5 billion worth of shares in Tesla just days after he agreeing to buy Twitter.

🔥 The US personal consumption expenditures price index – the Fed’s favoured measure of inflation – “climbed 6.6% in the year through March, the fastest pace of inflation since 1982”.

📈 Eurozone inflation hit a fresh high of 7.5% in April, a sixth consecutive monthly record.

🏰 Stagflation/eurosclerosis: Eurozone GDP increased just 0.2% in the March quarter, reflecting “a contraction in Italy, stagnation in France and weaker-than-expected growth in Spain. Germany, the region’s largest economy, narrowly avoided a recession”.

🛍️ US consumer confidence rebounded 9.8% in April, although most of the improvement came from gas price expectations. Overall sentiment “was still lower than in any prior month in the past decade”.

🏝️ The Solomon Islands' PM, Manasseh Sogavare, accused Australia of double standards, and that his country “should have been consulted to ensure that this Aukus treaty is transparent since it will affect the Pacific family by allowing nuclear submarines in Pacific waters”.

🎾 “A London court has sentenced German tennis great Boris Becker to jail for two years and six months for hiding hundreds of thousands of pounds of assets after he was declared bankrupt.”

🚜 UK MP Neil Parish was suspended after “watching adult content twice” in the House of Commons. He claimed “it was tractors I was looking at. [But] I did get into another website that had a very similar name”.

🤳 Influencers rejoice: Snapchat showed off a flying camera called Pixy, a small drone “designed to pair with the Snapchat app, lift off from the palm of its owner’s hand, quickly capture a photo or video, and zoom back down to the person’s palm”.

🦘 During “a series of Respect at Work training sessions”, government ministers in NSW “were told to quit using the word ‘mate’,” because it wasn’t deemed inclusive enough.