Abbott won't find joy in asset bubbles

A post-Abbott 'bounce' quickly turned into a housing 'bubble'. A genuine economic uplift will require consumer spending and business conditions to improve.

What should be counted as an 'Abbott bounce', and what should not? Many in the business community hoped that election of a Coalition government would cause a surge of optimism to get the economy moving again, but some indicators are misleading.

Most obvious is the current heat in both share and housing markets. The ASX200 has put on 1.7 per cent since the election and house prices are leaping ahead at an annualised growth rate of around 10 per cent.

As Stephen Koukoulas has argued, there may be a wealth-effect bounce that will flow from this asset price inflation, and we might be seeing that in positive comments from David Jones boss Paul Zahra about a still unquantifiable turnaround in the discretionary retailer's sales and margins.

But then again we might not. A broad based recovery in consumer sentiment, though indicated by the Westpac/Melbourne Institute and Roy Morgan consumer sentiment figures in past weeks, is at a very vulnerable stage.

Talk of a 'housing boom' turned, within the space of a few weeks, to RBA talk of the possibility of a 'bubble' and new debate over macroprudential restrictions to lending – a bold experiment being led by New Zealand to try to stop house price inflation while still leaving interest rates at ultra-low levels to stimulate the rest of the economy.

The RBA is worried by the $80 billion self-managed super funds have ploughed into the housing market recently – risk averse investors sitting on piles of cash want to move into risk again, and what better way to do that than a leveraged punt on rising house prices? The RBA has a right to be nervous.

But the Coalition is also nervous about the housing bounce. Assistant Treasurer Arthur Sinodinos told Fairfax Media yesterday that he wants to “level” the “playing field” between super fund sectors. That's more than a little bizarre – if SMSFs can run rings around the industry and retail funds and produce better returns, then there is only one way to level the playing field. Convince the big funds to try harder.

Actually, what Sinodinos means but can't say, is that he doesn't want a housing collapse on his watch. And nor should he. A genuine 'Abbott bounce' is about a reinvigoration of productivity, particularly in non-resources sectors, not short-term asset bubbles.

Which brings us back to the ASX again. Growth in super investments in Aussie shares is all heartening stuff, as long as the international environment is not permitted to encroach on our asset-growth fantasies.

The global pull-back of money expected to accompany the tapering of the Fed Reserve's extended bond-buying orgy has been put on hold, but can't be put off forever. Recent news that Janet Yellen might take over and continue Ben Bernanke's QE splurge turned our falling dollar around and, I would suggest, put new life into the ASX. 

Why is that a 'suggestion'? Because nobody really knows the net effect of overseas retail investors in our sharemarket (and super balances) at this time. As Saul Eslake told me a couple of months ago, we know institutions have long-term defensive positions in our market, but we just can't count the number of Japanese grannies who might, rationally or otherwise, decide to bring their money home or shift back to US risk assets.

In essence, then, don't watch house prices or the stock market as signs of an Abbott bounce. What we need is continuing growth in consumer and business sentiment that is able to withstand an eventual softening or reversal of the current champagne explosion in our on-paper wealth.

If that can gain momentum, and job creation revives, there will be a real bounce worth talking about. Froth and bubbles aren't enough.

As Alan Kohler pointed out some weeks ago, the end of the mining investment boom will see a third of our GDP growth wiped off, with no clear sign of anything growing to replace it.

Joe Hockey and his assistant Arthur Sinodinos (surely they've got their job titles mixed up?) are presiding over an uncertain time. All Australia should be praying for a bounce that will start the nation on a long climb to bigger and better things. But if that bounce is all asset bubbles, we're only witnessing the beginning the our slide into oblivion.

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